Normally, CalPERS stakeholders, even important ones, hew to a ritual level of deference in interacting with the CalPERS board, even when protesting against the giant fund’s plans. That posture has always bothered me, since it seems to go beyond famed California nice, as well as the upper class norm of hewing to standards of discourse, and that includes not making too much of a fuss about anything. For a society that prizes the appearance of egalitarianism, it’s awfully reminiscent of subjects petitioning a monarch.
So it is refreshing as well as revealing that two prominent retirees sent blunt letters that object strenuously to CalPERS private equity plan. The fact that they felt compelled to send forceful and well-documented missives says they are alarmed. They see CalPERS intending to act in a way that is almost impossible to square with the obligation of the pension fund to put the interest of beneficiaries first. Moreover, most finance and business-savvy would see their concerns as well warranted.
We are including one letter from former prosecutor David Soares, sent as an e-mail, in the body of this post; the other, by Al Darby, the president of the Retired Public Employees’ Association, is embedded at the end.
We are also embedding three all-too-obviously-generated-by-CalPERS letters sent on the letterheads of unions in CalPERS’ orbit. A former employee who is concerned about private equity sent them to me.
Note the contrast between the detailed arguments made by Soares and Darby versus the repeated text that appears in all three of the union pieces.1
It’s one thing to try the canned letter trick with mass market “save the whale” petitions and quite another to resort to it on letters intended for the CalPERS board on its biggest initiative in recent years. It says that CalPERS staff was too lazy to generate a unique letter for each cats paw. It also says the union officials who signed these letters sent them back with only a mild revision as a matter of form. We’ll show how this confirms that they lack an independent or informed view
Not only are the arguments in these letters handwaves, but CalPERS’ can’t even make an honest case through its proxies. All letters argue based on absolute returns, when any finance student who tried that on an exam would fail. What matters is risk-adjusted returns, and CalPERS and a considerable majority of investors in private equity have not gotten returns in private equity high enough to offset the risks over the last decade. Top executives in private equity have been warning since 2016 to expect even lower returns going forward.
The letters also create a straw man by acting as if the choice is between committing to CalPERS’ scheme or giving up on higher returns. First, as JJ Jelincic has said, what CalPERS needs is not private equity per se but higher-return strategies. CalPERS has presented nothing to demonstrate that it’s reasonable to expect this scheme to do that; in fact, it’s admitted that its “Warren Buffett” strategy will deliver lower returns than conventional private equity. CalPERS has yet to offer a coherent reason why it is refusing even to consider the most obvious way to get better returns in private equity, the one recommended by Dr. Ashby Monk (and before that, endorsed by McKinsey) of bringing private equity in house.
The three union letters also claim that CalPERS has done serious research, when that is false. We did a PRA of what CalPERS’ research amounted to. They interviewed Big Names who for the most part were too removed to give any insight, and the few who might know something had glaring conflicts of interest. We found out that one of the supposed interviewees, Professor Ludovic Phalippou, was asked out for a drink with a CalPERS guy and was shocked to learn that 45 minute chat was depicted as an interview for CalPERS’ planning purposes. I also got the documents CalPERS said it used in its “research”. As a former consultant who regularly did strategy research, I can confirm that there was no there there. I suggest that these three authors get the results of my PRA #3286 and see for themselves.
The letters also contend that the plan is well thought out. The fact that CalPERS, after nearly two years, has admitted it has only a concept and keeps changing major features at virtually every board meeting, demonstrates otherwise.
And the places where the letter authors apparently did try to add their own ideas just shows they don’t know enough to have an informed point of view on this plan, even if they actually had tried to make an independent assessment. Get a load of this howler from the California School Employees Association letter, signed by Executive Directors Dave Low and Keith Pace:
Given CalPERS fondness for telling Big Lies, it should come as no surprise that their allies are taking a page from that book. As anyone with an operating brain cell knows, private equity has been a major force in cutting jobs, breaking unions, and cutting retirement benefits. In our review of Eileen Appelbaum’s and Rosemary Batt’s landmark book Private Equity at Work, we pointed out:
One of the most striking is the authors’ discussion of an extremely extensive series of analyses on the employment impact of private equity ownership, conducted by Stephen Davis and his colleagues. The papers (a series produced from 2008 to 2013) rely on data from 5000 target companies and roughly 300,000 target establishments (an “establishment” is a single work location, such as a store or factory). For some of the papers, smaller subsets were used. But in each case, Davis et al. developed controls by matching PE owned establishments with ones that were as similar as possible in terms of size, industry, age, and other key factors.
One of the most widely publicized findings out of this extensive body of work was that employment shrank at private equity owned establishments at a greater rate than in the controls over comparable two-year periods.
It’s been striking to see public pensions help fund anti-worker, anti-union players and blinker themselves to how this weakens public pensions, both by lowering employment and incomes, which hurts state and local tax revenues, and by shortening private sector job tenures and weakening their rights, which leads voters to see public sector workers as pampered, which then generates calls to cut their pay and benefits, particularly pensions.
A former union official was so upset about this section that he sent it to the AFL-CIO national officials, and they aren’t very happy about it either.
But this is par for the course for what we’ve seen for the effort to design and sell CalPERS unorthodox private equity scheme: ignorance leading to abject misrepresentations.
Now to the letters. Have fun and circulate them widely!
My name is David Soares. I am a licensed attorney and a CalPERS beneficiary, having retired at the end of 2016 after serving for 32 years as a prosecutor for the County of Santa Clara. During my career as a prosecutor, I also represented over 300 prosecutors and public defenders in collective bargaining for 12 elected terms on the board of the Santa Clara County Government Attorneys Association. I currently serve as a board member of the California Retired Public Employees Association, although I write to you today in my individual capacity as a CalPERS beneficiary and a taxpayer.
I am extremely concerned about the propriety of approving Agenda Item 8a of the March 18, 2019 Investment Committee Agenda, entitled “the Action Item — Total Fund.” I have followed with great interest the moving target that has been variously called “CalPERS Direct” or more recently, “Private Equity Pillars III and IV.” I’m very concerned that CalPERS has left the position of managing investment director for Private Equity unfilled for the past two years, that the current Chief Investment Officer has only been on the job for two months, yet staff are asking for a board vote on a vaguely-defined “concept” on an “unknown” timeline with unidentified “partners.” The only document offered in support of this requested delegation of authority is Attachment 1, a 12-slide PowerPoint presentation which contains a few aspirational platitudes but no specifics at all.
To vote in favor of a vague “concept” as is set forth in Item 8a would be the very definition of a violation of fiduciary duty by a member of the CalPERS board.
California State Constitution Article XVI section 17 mandates that the individual members of a public pension board act as the sole fiduciariesresponsible for providing benefits, minimizing contributions, and defraying reasonable expenses of the fund. The Constitution goes on to require that the members of the board, “…shall discharge their duties with respect to the system with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with these matters would use in the conduct of an enterprise of a like character and with like aims.”
As a lawyer who has served on various boards, I feel that it is important to remind each member of the CalPERS board what it means to act as a fiduciary — especially the meaning of a fiduciary’s Duty of Care. The Duty of Care most importantly encompasses the Duty of Inquiry — to go out and seek information about the wisdom of proposed actions. In exercising the Duty of Inquiry, a fiduciary must follow the Business Judgment Rule, which requires making Reasonable Inquiry, entertaining a Good Faith Belief in the prudence of a course of action, and having No Personal Interest in the outcome. In addition, a prudent fiduciary investing assets must avoid speculation and avoid waste.
I am especially concerned that the board exercise its Duty of Inquiry as to the claims being made in Attachment 1 about Private Equity performance as an asset class. The CalPERS 2017-18 Comprehensive Annual Financial Report (CAFR) lists Private Equity investments at “Net Asset Value” (NAV), often simply leaving as a blank space the field “Profit Sharing Paid” (Carry). One must question the claims being made about the astounding recent performance of this asset class, especially considering that this occurred during a period of divestment from the class as a whole. While a fiduciary may rely upon the opinions of experts, these claims raise serious questions about the expertise of the staff urging adoption of this “concept.”
The only proposed benefits emanating from board approval of the so-called “concept” are “increasing the scale” of the Private Equity asset class, and “fostering an improved alignment of interest with the partners.” I note that the CalPERS board and investment staff spent the period 2009 through 2015 reducing the scale of Private Equity investment from approximately 15 percent of assets to the current 8 percent, largely because the board had found that this investment class was the source of corrupting influences that led to the current imprisonment of the former CEO of the fund, the suicide of a former board member, and the resignations of several board members who were under the cloud of a criminal investigation. There is nothing in the current transmittal or supporting attachment which addresses how to correct this troubling history of mis-alignment of interests between the partners and the members and beneficiaries.
The only “concept” that appears to have been put forward in Item 8a is that there is no concept. To vote in favor of such a non-existent “concept” would be a willful abandonment of fiduciary duty by the board. There is no urgency. The February 24, 2019 edition of the Wall Street Journal reports that CalPERS partner BlackRock has been unable to raise funds for their “Warren Buffett Strategy,” and we know that Warren Buffett himself has announced that he has no plans to deploy funds in the coming year. For CalPERS to embark on such a course without a formal managing director of Private Equity in place is the height of imprudence.
Santa Cruz, California
Cc: Hon. Gavin Newsom; Hon. Betty Yee; Hon. Fiona Ma; Hon. Jerry Hill; Hon. Freddie Rodriguez; Hon. Mark Stone; Hon. Bill Monning; Hon. Ro Khanna
Cc: CalPERS BoA: Rob Feckner; Eraina Ortega; Adria Jenkins-Jones; Henry Jones; Ramon Rubalcava; Theresa Taylor; Bill Slaton; Dana Hollinger; David Miller; Margaret Brown; Jason Perez
Cc: Michael Hiltzik, Los Angeles Times, Susan Webber, Naked Capitalism
Cc: Santa Clara Co GAA, RPEA
1 The inclusion of typos, like “75%” as opposed to “7%,” does not count.00 Al Darby RPEA Letter to Henry Jones and CalPERS Board
00 SEIU PE letter
00 CalPERS Board private equity letter CSEA
00 CalPERS - Investment Committe -private equity 2-19-19 CPF