Remember the CalPERS “private equity new business model” fiasco, where the giant fund lurched from scheme to scheme, with ever-changing rationalizations, only to have the entire effort fall into a heap?
And recall that this huge waste of PR, management time, and credibility came about because CalPERS actually did recognize it had a problem, yet refused to do the right thing? In this case, the problem was that CalPERS was unlikely to produce better than index-like returns from investing in private equity by virtue of its size. Those returns had been for a decade, if not longer, indefensibly low on a risk-return basis.
Rather than pursue one or a combination of sensible alternatives,1 CalPERS insisted on trying to make various Rube-Goldberg-cobbled-together-variants-of existing-approaches-presented-as-“innovative” (when “innovative” in finance = “the customer is having his pockets picked”) make sense. The effort collapsed under its own contradictions.
CalPERS is in the midst of another embarrassing cock-up, except this one has far more serious ramifications. CalPERS’ continuing failure in its efforts to hire a Chief Investment Officer, its most important and best paid position, is making it a ridicule all over the world. That’s because the idea of a huge investor operating for more than a year with no one steering its investments is insanely negligent.
Yet despite offering an even bigger pay package than than the former incumbent received, CalPERS has made clear it has gotten nowhere and have even “paused” its search until 2022…after pausing it twice before:
Remember that CalPERS former CIO, Ben Meng, resigned abruptly after we broke the story that he had apparently violated California’s strict financial conflict of interest law by holding shares in Blackstone when he also approved a $1 billion investment in a Blackstone fund.2
Leanna Orr, in her London-based newsletter The Allocator, lambastes CalPERS for having its most important post remain vacant for so long. Yet her meant-to-be embarrassing account actually spins some key issues in CalPERS favor, either via error or omission. In other words, the picture is even sorrier that Orr indicates. But she does say the bits she gets at in a lively manner:
It pains me to report that America’s largest asset owner couldn’t net a decent CIO if one swam nudie in its $444bn pool.
A decent CIO from the outside, that is.
More than a year after CalPERS began looking for someone who’d steward their coffers & endure ritual torture in exchange for millions of dollars, the board still hasn’t found anyone. Which, good? Those of you who deserve the responsibility of running CalPERS are way too smart to take it. Seeking candidates fluent in:
• Boardroom infighting
• Political scheming
• Fielding accusations of espionage, treason from dumb-dumb senators
• Overseeing minimum $50bn or $400bn, depending on the board member who’s deciding your fate
• Top-notch performance, regardless of size and/or length of tenure
• Securing the golden years of a huge, deserving population, while dollar-store Ann Coulters try to make you & your members the enemy
Forget Alaskan crabbing: CalPERS’ investment portfolio is the world’s most dangerous catch.
Investing is full of professionals who are sufficiently brave, calculating, foolhardy, or optimistic enough to give most anything a shot. But they’ve already gotten the credible hard sell, only to have the search cancelled while they’re in it for lack of decent candidates.
CalPERS’ ability to snatch defeat from the jaws of adequacy is a marvel. More than a year ago, the board set off with the sector’s best headhunter, $3m+ in bait, and the promise of unparalleled impact for the right investor.
The groundwork was all there, and that’s progress. The search ended with no CIO, 0 offers extended, -1 recruiter, & a peeved candidate pool.
In March, CEO Marcie Frost called the attempt a failure & announced CIO Search 2.0: The Second Coming. Out with Korn Ferry vet Michael Kennedy; in with… Dore Partnership? Does anyone know who these people are?….Dore’s website puts “Asset Owners” high on a short list of its specialties…. It’s funny though, that this “long history” with asset owners doesn’t exist on the website before 2020. Of the three practice leaders, one is a PE specialist, one’s the risk & analytics guy, & the third is founder Charles Dore himself — C-suite generalist.
Is this second search real?
This is all good fun, but it would help if Orr had her facts right. Aside from the timetable of the searches, the credible surmise that the Dore Partnership search is a big headfake and CalPERS looks to be planning to hand the job to proven value-destroyer Dan Bienvenue, who lost CalPERS billions in 2017 with a bad emerging markets bet, Orr is wrong in nearly all her particulars…and wrong in ways that let Marcie Frost off the hook.
First, Orr is mistaken in her most important claim: that CalPERS has not attracted top caliber candidates. We know of two CIOs of large to very large funds, each with strong investment records and experience working for a public pension fund, who applied to be CalPERS’ CIO. In other words, they both had the needed money management chops and were not under any illusions about what it means to work in a public pension fund fishbowl.
Bizarrely, both were rejected. We have more detail about what happened to one candidate. He was met with open hostility from the very outset of the board interview by one member of the search subcommittee. Insiders tell us that that board member is very attached to the idea of having a CIO who is not a white male….which is what both of these stellar candidates were.
Orr is thus simply wrong in her contention later in her missive that choosing a “diversity box-ticking candidate” has nothing to do with why the recruitment has failed. She’s also steered badly in relying of the views of other search professionals defending Michael Kennedy, the star headhunter, when these sources had zero direct contact with CalPERS and were merely spitballing. The outcome was not due to board infighting but due to the board subcommittee in fact imposing diversity criteria that were highly unlikely to have been in the formal spec.
Remember, It is almost certainly true that Marcie Frost and staff, who would hire the search firm and work with them to define the hiring criteria, would not want to constrain the process unduly. For them, checking diversity boxes would be a plus but not a “must have.” But it’s the board search subcommittee that is conducting the interviews. The intel we’ve received from independent sources is that one board member had a unbending preference a non-white-male CIO, over and beyond the formal recruitment mandate. And given how gung-ho the board is as a whole about ESG, it’s highly unlikely that anyone on the subcommittee would have opposed this board member.3
Second, Orr skips over the culpability of CalPERS management and board in this mess in letting Meng get out so far over his skis in the first place and then acting as if they could cover it up when they worked out in April 2020 that Meng had approved a $1 billion Blackstone commitment.
Third, Orr’s list of bullet points is almost entirely wrong. CalPERS is too inert and too much a cult of Marcie Frost to be afflicted by infighting or scheming. To the extent there is board “infighting,” it’s slapping down the minority of one-at-a-time board members who want CalPERS to adhere to legislatively-mandated transparency and accountability standards. This hasn’t gotten past the level of silly public bickering and has nearly always been resolved in favor of the “hand the keys to the store over to staff” faction, which favors a CIO operating with no oversight.
As for US senators hassling the former CIO Meng, that’s because he had just worked for the Chinese government, a fact set highly unlikely to apply to any replacement. And being harassed by out of state Republicans in Democratic-owned California if anything garnered Meng sympathy and support where it mattered, in the California administration and legislature.
Orr might also bother boning up on how CalPERS works. Individual board members have nada to do with how the CIO operates. The board’s only direct report is Marcie Frost, who is the CIO’s boss. The board cannot fire the CIO and they aren’t even allowed to talk to him directly outside formal board meetings. Any queries from board members to staff members go through Board President Henry Jones to Marcie Frost, and she or other staff members may field the query. Delegated investment authority of the CIO (as in how much he can spend on any particular investment without going to the board for a rubber stamp) is a matter of formal board policy. It in no way, shape, or form is subject to individual board member influence.
The last bullet point, about “Ann Coulter” sniping is irrelevant in Dem-controlled California. The whinging from papers in conservative areas of the state, like the Orange County Register, are at best ankle biting.
Now that could all change if Gavin Newsom is turfed out and a Republican becomes governor. The governor directly appoints two of the 13 CalPERS board members and has some sway over who from CalHR and the State Personnel Board are chosen to serve. A revolution in Sacramento would most assuredly send shock waves even to the well-bunkered CalPERS. But there’s nothing in the Orr’s piece that suggests that she was considering this scenario as a deterrent to a CIO candidate.
Finally, Orr omits a far more important issue than CalPERS signaling loudly that it is an organization in crisis by not being able to land a new CIO: going rudderless is costing beneficiaries and California taxpayers big time. We pointed out that CalPERS fiscal year 20-21 returns were dead last of 34 public pension fund results reported recently in Pensions & Investments. Famed quant analyst Richard Ennis said via e-mail that this result was even more shoddy because CalPERS should have beaten most of its peers:
My forecast of the average FY 2021 return for June 30 public funds is in the vicinity of 28-30%. My forecast for CalPERS was several percentage points higher yet because of its particular characteristics. The return of 21.3% is one of the largest annual shortfalls I have seen. It will be interesting to see how this plays out.
Read again what Ennis concluded: CalPERS returns should have been roughly 10% higher than they were, on the order of 30% to 33%, not the 21.3% CalPERS delivered.
Needless to say, this result is also an indictment of the interim CIO, Dan Bienvenue. At a minimum, he should have been attempting to unwind some of Meng’s bad calls, like implementing factor investing in a way that reduced public equity returns. There’s no sign that Bienvenue thinks there’s a problem, despite the appalling miss, let alone plans to do anything about it.
And here Orr is again remiss is calling the odds that Bienvenue will wind up CIO due to search failure as merely a back-door way to get a white straight male CIO, as opposed to also being a very bad outcome. Bienvenue not only does not have the experience to fill the post, but his investment record is poor. In fact, it’s a mystery why he hasn’t been fired. He was responsible for a bad emerging markets bet in 2017 that cost the fund billions and all of the active funds he managed were shut down. But failure apparently isn’t an obstacle to moving upwards at CalPERS, not matter how serious the risk.
1 We have described them repeatedly over the years:
1. Cut back on private equity and lever portfolio wide if needed as private-equity-allergic German investors do to achieve desired total risk levels:
2. To considerably reduce return-wrecking private equity fees and costs, bring private equity investing in house
3. Pursue public markets replication of private equity strategies, which have consistently delivered returns better than median private equity returns.
2 Recall that CalPERS knew that Meng held Blackstone and Carlyle shares and a stake in an Ares credit fund as of his “assumed office” financial disclosure statement filed January 31, 2019. CalPERS knew then that Meng had a conflict problem because CalPERS regularly invested in Carlyle and Blackstone funds and was almost certain to invest in a new flagship fund, and possibly niche funds too. Yet no one told Meng to divest these positions or put them in a blind trust. In other words, the Meng fiasco was a self-inflicted wound.
3 We’ve heard nary a peep of internal or board unhappiness the particular board member (whose name we have) who stymied the hiring of one superbly qualified CIO. That suggests that there may be other agendas at work. For instance, due to Meng having poor English skills, Marcie Frost regularly prattled on about investments, even though she’s regularly stick her foot in her mouth. A competent CIO would field those questions, reducing Frost’s time with the media. In other words, Frost has never had a standout CIO at her side and would clearly be upstaged by one. She is unlikely to welcome that.