Bizarre Valedictory Interview by CalSTRS Investment Chief, Chris Ailman, Asks Private Equity to Be Nice and Share with Workers

The Financial Times made its interview with departing CalSTRS’ Chief Investment Officer Chris Ailman its lead story yesterday: Private equity should share more wealth with workers, says US pension giant. The Financial Times was too polite to say so, but Ailman could lay claim to being the best large public pension fund chief investment officer. CalSTRS, which manages the pensions of California teachers, is in the same general size league as its Sacramento sister CalPERS, and regularly outperforms CalPERS by a meaningful margin.

We have commented over many years about the degree of intellectual capture, Stockholm syndrome, and soft corruption among investors in private equity funds (called “limited partners”; the private equity fund managers like Apollo and Carlyle are “general partners”). Ailman, who is a devout Christian and no doubt has a very lucrative pension, does not need to curry favor with private equity any more, unless he perhaps fancies staying relevant in his retirement by serving on the board of one of the private-equity-oriented NGOs. But it isn’t just that he may not want to rock the boat on behalf of his legacy and the colleagues he is leaving behind at CalSTRS. I have no doubt he sincerely believes this idea of getting private equity firms to be a bit less ruthless towards the workers in their acquired firms is the best way to reduce the damage they do to society.

First, let’s look at the germane parts of this story:

Private equity executives need to “share the wealth” they create with workers at the companies they buy, according to the investment head of Calstrs, the giant US pension fund that is one of the world’s biggest investors in the sector….

“Private equity has not shared enough revenues,” said Ailman, who pioneered Calstrs’ move into private equity two decades ago and now holds $50bn in the asset class, in an interview with the Financial Times.

“It’s great they make money for our retirees — who are teachers and for other funds,” he said. “But they need to also share the wealth with the workers of those companies and with the communities they invest in.”

It’s hard to know where to begin with this. Limited partners like CalSTRS, who are, in Wall Street parlance, the money, have not even been able to get basic disclosures from the general partners like how much in total the private equity firms hoover out in fees and expenses, despite many years of pleading. Mind you, it’s a requirement for a fiduciary to evaluate the costs and risks of any investment, yet these investors have accepted this abuse.

Limited partners don’t get P&Ls of portfolio companies. They don’t get independent valuations even though that is considered to be essential for every other type of investment. So it’s ludicrous to think that general partners will share money with one of the very weakest parties in the picture, mere workers, when they won’t give information to the limited partners.

Someone new to this topic might wonder why limited partners don’t say “no”. The reason is they perceive private equity to be necessary for them to earn enough to reduce their level of underfunding, which in the public pension fund world is typically pretty bad. To make up for the shortfalls, pension funds like CalPERS and CalSTRS have also been increasing the amount they charge to cities, counties, and other local government entities. These pension costs are taking up larger and larger proportions of these budgets, creating concern and anger.

Investors like Ailman haven’t even worked out that private equity has been selling them the rope with which they are hanging themselves. Private equity pay and manning-level squeezing crimps incomes, and with it, all sorts of government revenues that derive from income and sales taxes. The more than occasional bankruptcy kills jobs and often puts commercial and residential real estate on the market, hurting values and thus over time, property taxes. One can’t know for certain how much, but communities all over California would be better off if private equity predators were not stalking the land. Consider these observations from the Financial Times’ comments section:


Pe represents toxic finance at its worst. I’ve now worked at 3 companies that were taken over by pe companies and the playbook was the same every time. They demoralised the workforce, p@ssed off their customers but somehow managed to make their kpis and ebitda targets and then sold it to mugs who were left with a smoking ruin. They load the order books beyond their their ability to deliver, gut the delivery organisation so it’s on life support but still delivering enough to maintain credibility to a potential buyer. Destroy morale and then announce what a great organisation they’ve created when they hit the targets and they sell out paying no tax and leaving a mess behind them. Truly destructive organisations run by amoral unscrupulous get rich quick types. The so called efficiencies they’ve created aren’t real.


Over the last ~20years Ive been working for orgs taken over by PE, and also a customer of orgs taken over by PE.

And by PE I mean the highly leverage, financially engineered type.

As an employee the only advice I can offer is to group together and walk out as a group. Your employment experience will only get really really bad.

As a customer of orgs/products took over by PE – start planning on removing the org/product as soon as takeover happens.

Basically – scorched earth strategy.

PE creates wealth in the same way that burning your money keeps you warm.

On top of that, all of that pillaging does not benefit the limited partners. Many studies, when you carefully cut their metrics, have effectively found that private equity has not out-performed on a risk-adjusted basis since the early 2000s, potentially even the last glory year of PE, 1999. The Financial Times has regularly run article featuring the analysis of Oxford professor Ludovic Phalippou, who has found that private equity has not even outperformed stocks on a nominal (as opposed to risk-adjusted) basis since 2006. The dean of quantitive portfolio analytics, Richard Ennis, has written many studies showing that for public pension funds and endowments, investing in “alts” (alternative investments which include private equity) is investment office featherbedding. It creates tons of busywork via overdiversification without increasing returns. Ennis has ascertained they would do as well, and potenally better, by dumping all the alts and sticking to simple stock and bond strategies.

In other words, to the extent private equity does outperform, the general partners suck it all out for themselves.

But worse, Ailman, admitting to falling private equity returns but not admitting to the reality we set forth above, has left his successors with a ticking time bomb by leveraging up on his already-leveraged “alts” positions. The excuse is that it’s necessary to have enough liquidity. What about cash? Leverage to achieve that end via anything more complicated than commitment fees for typically unused lines of credit screams of trying to boost returns.

Recall that leverage on leverage was what made the 1929 and 2008 crashes so spectacular. Further bear in mind that Ailman does not acknowledge that the private equity general partners themselves are often, perhaps even routinely, engaging in leverage by borrowing at the fund level in addition to borrowing against portfolio company assets and income.

This is the bland description from the Financial Times:

One of his final acts has been to obtain board approval for a controversial $30bn of borrowing to help manage the fund’s giant illiquid portfolio. The move attracted concerns that the fund had become overweight with illiquid assets, which are not easily traded.

Ailman signalled that its private markets allocation, which includes assets such as private equity and real estate and which amounts to about 40 per cent of the portfolio, had peaked.

The Financial Times also presents the image that private equity is nevertheless making some concessions to labor, presumably in response to political pressure:

Ailman’s comments come as the private equity industry faces increasing pressure from regulators, campaigners and investors due to its growing influence over the American corporate landscape and a series of scandals involving workers at businesses they own…

He added that Calstrs had been putting pressure on managers such as Blackstone behind the scenes over their investments. “We go directly to our general partners to have conversations, we just haven’t done that in the press,” he said.

Some private equity managers have taken steps to ensure that employees at companies they own can share in the profits, if the firm performs well.

New York-based buyout group KKR says that billions of dollars in equity have been shared between more than 60,000 employees at its portfolio companies since 2011.

Last year, the firm committed to offering equity-sharing programmes to all employees in the takeover deals coming from its $19bn North American private equity fund and in all future funds in the region.

More than two dozen buyout groups, including Apollo, TPG, Warburg Pincus and Advent International have committed to a plan called Ownership Works that aims to generate more than $20bn in wealth for workers by 2030.

If you believe that these ownership schemes in the end will generate more than a hill of beans, I have a bridge I’d like to sell you. If you have followed our work over these many years, or looked at the limited partnership agreements we posted, private equity firms are the masters of “heads I win, tails you lose” provisions. Moreover, it isn’t clear to what extent actual vested equity won’t wind up being effectively an exchange for current wages.

The Financial Times peanut gallery is as skeptical as I am. For instance:

Abby P

Sorry, has he really *met* people in PE? They are not the type to share wealth, they do the opposite. They bribe politicians to get themselves a lower tax rate then wage earners. They feed themselves dividends while loading their companies with debt.

Quietly fuming

That’s exactly what won’t happen. Have you ever worked with them?

Maron Fenico

It appears that someone is justifying his decision to invest in private equity when returns have become riskier while fees remain outrageous. What to do? Deflect by suggesting the ridiculous idea that the employees of portfolio companies “share the wealth.” This after a decades-long wealth extraction by PE from these employees and the portfolio companies who employ them, a strategy that is now, finally, coming under intense scrutiny. The cancerous effects of PE have infected most American industries, causing millions of lost jobs, destruction of entire communities, poor service, especially in the health care space, while contributing to the yawning wealth gap in the U.S. PE titans- Ackman, Rowan, etc., are now using their political power to make and break university administrations to ensure that the marginally intelligent children of their class –legacy admissions– retain a seat at the best schools unburdened by DEI.

It’s striking that Aliman didn’t advocate for the most obvious way to redistribute at least some wealth away from private equity to communities at large: ending the carried income loophole, which has the effect of allowing private equity barons have ginormous amounts of ordinary income taxed at capital gains rates.

Sadly, this story confirms that private equity faces no challenge to their unending appetite for more money. Even though trees don’t grow to the sky, the only thing that might curb their rapaciousness is a crash….which even then won’t damage them all that much, unless the pitchforks come out in a big way. Buy panic room futures.

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  1. John Wright

    This event reminds me of the Eisenhower “Beware the Military-Industrial Complex” speech.

    Eisenhower give this speech as he was headed out the door on January 17, 1961.

    He gave this warning when he had no power to change things, just as Ailman.did.

  2. mrsyk

    One of his final acts has been to obtain board approval for a controversial $30bn of borrowing to help manage the fund’s giant illiquid portfolio. The move attracted concerns that the fund had become overweight with illiquid assets, which are not easily traded.
    No lessons learned from 2008. Leverage on top of leverage in an treacherous interest rate environment, a house of cards waiting for a breeze.

  3. David in Friday Harbor

    These are empty platitudes with no agency or execution strategy specified. Ailman seems to feel obligated to “say something” about the brazen looting of the economy that his trust fund has financed. Private Equity looting has played a large part — although only one part — of the vaporization of state and local tax revenues that the public pension funds are dependent upon.

    Realistically, these pension funds have come under pressure from the political establishment to steer “a little money” to their “friends.” The magic of IRR and EBITDA let them pretend that they were getting decent returns. The “tell” is that Ailman laments that “we assumed” at the beginning that PE would deliver a 500 basis point better return over publics, but now thinks it’s a diminishing-to-the-vanishing-point 150 point delta. Then he mentions fees “needed to be lower” in the next breath — which nobody in public pension land honestly accounts for in their return assumptions.

    Ailman is simply washing his hands of responsibility for the investments that will one day be blamed for dragging the public pensions underwater along with the hundreds of thousands of civil servants who depend on them. It’s pathetic.

  4. griffen

    PE parlance is simple to understand…Tails they win, Heads they win ( my bad, not stealing the thunder and wasn’t intentional )…I can’t think immediately which company is advertising their wares but during market hours on CNBC, there is a recurring commercial for smaller individual investors to also partake in the Private Equity Buffet. There is some qualifying level of wealth, to be clear.

    Some buffet experiences are better than others of course. I can also speak on a limited basis to the notion of working for an employer that is PE – owned ( as a holding in their overall portfolio of companies, maybe that company was smaller potatoes ). I wasn’t impressed…

  5. JJ Jelincic

    When I was on the CalPERS Board I asked Christine Gogan, then the number 2 in PE how “offsets” worked. This conversation reflects the level of information Board members at CalPERS get. (To his credit Ailman was normally more forthcoming with his Board.)

    Gogan: We get audited statements.
    Me: OK but how do they work.?
    Gogan: We get audited statements.
    Me: Ok so we know the numbers are right but how do they work?
    Investment Committee Chair: You’ve asked enough questions. The meeting is getting long. We are moving

    BTW Gogan make $520K last year

    I couldn’t get the financial statements of even companies CalPERS owned 99% of.

    There is a reason Public pension plans are often called “dumb money.”

    1. David in Friday Harbor

      It is difficult to get a man to understand something when his salary depends on his not understanding it. — Upton Sinclair, EPIC Candidate for Governor (1935)

      All those “dumb” people got placed where they did for a reason. It’s raining “dumb” people at CalPERS because the rain-makers like it that way. You can fix “dumb” but you can’t fix crooked.

      As always, follow the money…

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