CalPERS should start to recognize that our hounding of the giant pension fund is to prevent it from doing things that will harm beneficiaries. The fact that the fund’s top management nevertheless seems determined to keep doing things that are at best wrong-headed, and too often are dishonest and obviously corrupt, should be getting a lot more attention from the mainstream press. As we’ll explain, CalPERS escaped being snared in a huge mess due to our intense question of clearly dodgy elements of its shape-shifting, poorly conceived private schemes by not handing all or most of its private equity investing over to a recently-establshed group under Mark Wiseman at BlackRock.
We now have two recent examples where heeding our advice would have saved CalPERS embarrassment and improved returns. The earlier one was CalPERS’ reversal on its ballyhooed plan to increase the funds it allocated to emerging managers. As we wrote on November 5:
The short version is that CalPERS, with a great deal of fanfare and board huzzahs, announced last year that it planned to increase its funding of its worst-performning private equity strategy, its emerging manager program. We said this was a very bad idea, since emerging managers (which are meant to be first time managers but these programs are really intended to favor minority and woman-owned firms) typically underperform, so there was no reason to expect CalPERS to improve upon its sorry record.
CalPERS has now gone dramatically in reverse. Staff, apparently without consulting the board, has decided to cut its emerging manager program for global equity, meaning public stocks, due to underperformance, and is dumping most managers. Staff even has the gall to treat board members as its hired hands, sending them talking points to back a policy change they had not reviewed, much the less authorized. While the information we’ve gotten doesn’t specify whether CalPERS is also cutting its private equity emerging manager program, the radical cut of emerging managers is consistent with the advice we offered in the private equity context.
Even if the private equity emerging manager was spared (and in fact may be difficult to cut back any time soon, since as we will discuss, CalPERS just more than doubled its commitment to an external private equity fund of funds manager for emerging managers), CalPERS would be well served to cut its commitment there as well, consistent with its newly-found investment discipline.
It at first looked like CalPERS would get away without being widely called out for this volte face, despite the fact that the idea of supporting emerging managers is popular with the legislature and some of the axed firms might have been able to get allies to make a stink
However, yesterday, apparently triggered by a report on Wednesday in a specialist financial publication that incorrectly called its tardy account an exclusive, Bloomberg ran Calpers Drops Most ‘Emerging’ Equity Managers as Returns Lag. In typical “the Blog That Must Not Be Named” fashion, CalPERS gave us a backhanded compliment by telling reporters they were late to the party:
Calpers spokeswoman Megan White, responding Wednesday to a request for comment, said the reduction “isn’t new news.”
With the emerging managers case, we can’t lay any claim to having influenced CalPERS’ behavior; we simply pointed out they belatedly fell in line with our recommendation.
Today, it was revealed that CalPERS managed to dodge a bullet, and here we do think we can claim some credit. BlackRock’s head of alternative investing, Mark Wiseman, was fired (both the Wall Street Journal and the Financial Times use “ousted”) for having an affair with a subordinate. Even more salacious, his wife, Macia Moffat, remains at BlackRock as the leader of its Canadian business.
Why does this matter to CalPERS? As we’ll explain, CalPERS looked determined to hand over a big portion, and potentially all, of its private equity portfolio to BlackRock for reasons that made no sense, and would at a minimum have led CalPERS to pay way more in fees. We exposed how the process was too obviously designed to favor BlackRock, despite the fact that it was a new entrant to the private equity game.
Insiders were so worried that CalPERS executives were still in BlackRock’s sway that they though CalPERS’ visible foundering over its private equity “new business model” would be used to give BlackRock another shot at a big portion of CalPERS’ funds, say by committing to BlackRock’s “Warren Buffett” style fund. Recall that one of CalPERS four gimmicky “pillars” was to set up a new vehicle to make that sort of long-maturity investment, even though experienced private equity firms soliciting investment in similar funds admit that they expect them to deliver lower returns than conventional private equity. Recall also that the Wall Street Journal reported that BlackRock was having trouble getting investors for its “Warren Buffett” megafund.
So why does the Wiseman defenestration matter? As Harvard professor Josh Lerner, who gave CalPERS advice on private equity in 2015, stressed, successful private equity firms have stable core teams. Turnover at the top is the very worst thing to have, since it usually means shakeups down the line, since a new executive will almost always bring along some loyal lieutenants who know how he likes to do things. The people who were in place often have trouble adapting and even if they don’t, they can resent their now greater distance from the throne and have an easy excuse to depart.
On top of that, the senior people at private equity funds are alway included in a short “key man” list. The key man provision is one of the very few sections of the generally take-it-or-leave-it limited partnership agreements that actually does get negotiated. In traditional private equity deals, the key man language gives the limited partners the authority to suspend or reduce management fee payments or even force a reorganization. There have only been a few case where it has come into play; even then, it isn’t clear that the limited partners did more than wring their hands. However, on a very-long-maturity fund, there would be vastly more risk of a key person dying or being unable to work, and would thus get stronger contractual protection. That appears to be the case with Wiseman and BlackRock. From Dawn Lim at the Wall Street Journal:
Mr. Wiseman’s departure triggers an automatic suspension of all new deals from that fund. The firm will have to get permission from a handful of key investors to continue investing. BlackRock said Mr. Kapito, the firm’s president, would become chairman for that fund, and investment decision-making remains unchanged as the firm remains committed to the strategy.
Wiseman’s exodus is even more disruptive than for a mature private equity firm. He’d come over from one of Canada’s public pension funds in 2016 to launch a large-scale private equity operation. BlackRock can’t begin to have the bench depth of an established firm and would still be partly in start-up mode. Moreover, Wiseman was 49. Given how young the operation and he was, it is also unlikely that there is meaningful succession planning in his business.
Contrast this shambolic outcome with how overeager CalPERS was to get in bed with BlackRock.
CalPERS staff falsely presented Wiseman as an unbiased private expert at a July 2017 offsite; did not tell board of a massive conflict of interest, that CalPERS was preparing to (or more likely already had) started preliminary talks with BlackRock. Note that CalPERS staff also presented Silicon Valley fixer Larry Sonsini as an independent source advice when he all too shortly was in CalPERS’ employ.
In early September 2017, Bloomberg broke the story that CalPERS is planning to outsource all of its private equity business to BlackRock. CalPERS hadn’t told the board, a serious breach. We explained why this idea was certain to cost CalPERS more in fees without a realistic prospect of better performance.
CalPERS tried to improve appearances, at least to the board, by organizing a sham, largely closed solicitation designed to favor BlackRock. Among other things, the invitation letters, which went to only six firms, went out on December 219 with proposals due in January 19. As we noted:
The “Private Equity Strategic Partner” and “Proposal Questionnaire” documents at the end of this post make clear that staff is in such a hurry that it hasn’t sorted out exactly what it wants except it wants out of private equity. This sort of “fire, aim, ready” that leads to massive self-inflicted wounds.
CalPERS is letting the supposed respondents define all of the critical elements of the arrangement, making CalPERS a stuffee. It also puts CalPERS at a disadvantage to the extent that it actually bothers trying to negotiate the agreement, since the “partner” will presumably provide the investment agreement, when any competent attorney would insist that CalPERS draft it (one of the cardinal rules of negotiating is “he who controls the document controls the deal”).
Needless to say, the fact that there is no proposal that “partners” are bidding on, but instead a “tell me what you think I should want” means the board has not approved this process. We have confirmation from inside sources.
As you can see, the schedule has the board approving vendors when it hasn’t even approved the content of the proposal!
Insiders told us that the process fell apart when BlackRock submitted a bid that was much higher than any of the others. Yet despite that troubling fact, some still feared that CalPERS’ inability to get out of its own underwear with its newfangled “private equity business model” could lead CalPERS to try again to hand the whole shooting match over to BlackRock. So Mark Wiseman’s career suicide was well timed, at least from the perspective of CalPERS beneficiaries and California taxpayers.
Marcie would not thank you if you saved her life.
Now, CalPERS beneficiaries should really really write a big thank you letter to you (and people at NC involved in exposing the cavalier approach CalPERS has to their funds and interests).
Bravo to Yves and NC’s continued reporting on this.
Great work. A suggestion is that words are important. It’s shameful and counterproductive that even “liberal” magazines refer to defense spending
And the defense department. I
Imo Offense spending is more accurate, but I’d settle for the neutral Military spending. And we used to be honest and call it the War dept.
Why say Emerging managers? I think that’s simply a euphemism for Inexperienced managers, correct?
There are consultants who claim they can pick emerging managers who will out-perform, but that’s a cottage industry of charlatans.
The reason the legislature likes them is that it’s a way to steer money to women and minority-owned firms. CalPERS isn’t allowed to discriminate among funds based on race or gender but the belief is the emerging manager category lets them get part way there.
Saw the same thing during the 80s in the civil construction industry with affirmative action contracts, end of the day it all went back door to the BSD mobs after floating over their fronts for equality …. progress ….
Well you know what they say. That the gods protects children, drunks and the CalPERS Board. That is two bullet-dodges that they have had – with NC doing their best to pull them back from the path of those oncoming bullets. You reckon that would be enough to earn NC a Christmas card this year? Marcie? Tis the season after all.
Shame about that Mark Wiseman but he wouldn’t be the first guy that came unstuck by thinking with the wrong head. He and his wife were a “power couple” which I first heard that term from the TV series “Survivor” and which I suppose is a good analogue for the financial environment. He was being groomed to get Chief Executive Larry Fink’s job but it looks like he was doing some grooming of his own. And on such sordid elements are the financial fortunes of CalPERS decided.
Since Christmas is coming up I will offer up some unwanted advice to the CalPERS Board and it is this. Cut out the mickey mouse crap schemes and get ready to batten down the hatches. Something in the winds tells me that 2020 is going to be a year of change. You’re welcome.
And now a message from Michael Jordan to the shenanigans of the CalPERS Board-
Setting aside the PE-related concerns and regarding the broader context of CalPERS dismissal of most of the fund’s external equity managers, I believe low cost, passive index funds have outperformed most actively managed funds over the past few years. To me, key questions are why that has been the case and whether and when that worm might turn. I don’t know the answers, of course, but share this writer’s view that the outperformance of passive index funds is attributable in large part to the targets of market interventions. If so, the key question then becomes to what extent this is a permanent fixture in financial markets? I believe the answer to that question rests largely in a political decision.
All of the tail-chasing (pun intended) over handing-off the CalPERS Private Equity portfolio to an outside manager absolutely reeked of corruption from Day One. Wiseman’s self-serving behavior was apparent when NC doggedly reported the story back at the beginning. It comes as no surprise that Wiseman’s lack of ethics extends to his personal life as well.
Sadly, Wiseman is cut from the same cloth as his evidently less-than-arms-length partner in crime at CalPERS, the now-departed Ted Eliopoulos. Wiseman is a lawyer who was CEO of the Canada Plan Investment Board before he waltzed through the revolving door to Blackrock. This is why having strong fiduciary oversight is so important — without adult supervision, greed will simply run amok.
That’s an important point I neglected to make: cheating on spouses looks to be strongly correlated with cheating in business. See this Bloomberg write-up of a recent study:
IMHO, using Ashley Madison isn’t merely a sign you are cheating on your spouse, but your are reckless about it. But that fits Wiseman. Cheating on your wife with someone in your company….and then who reports to you? Someone was guaranteed to notice.
And was Wiseman dumb enough to think awareness would be limited to people in his unit, who would stay silent out of loyalty? Didn’t it occur to him this would be a weapon other pretenders to the Larry Fink throne would be eager to use (as well as employees who believed his paramour was getting unfair advantage?)
Sadly, this inevitably leads to one of those the-chicken-or-the-egg conundrums.
Do people who can’t self-regulate their compulsive greed tend to rise to the top in this sector, or does the lack of external regulation in the sector unleash the compulsive greed within that we’re all born with?
Like with chickens and eggs, the answer appears to be “All of the Above”…
Spot on, the attempted outsourcing of the entire PE program was nothing more than a scheme to secure a cush sinecure for tanTeddy and those who sucked up to him in INVO. Blackrock’s poor judgement in employing not-so-Wiseman absolutely saved Calpers and their beneficiaries an enormous headache