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Calpers, the nation’s largest public pension, recently unloaded about $6 billion of its stakes in private equity funds to second-hand buyers reportedly at a roughly 10 percent discount to their value. That suggests either the pension’s opaque private equity holdings were not truly worth $6 billion (likewise, its remaining $40 billion-plus in private equity holdings may not be worth as much as Calpers claims), or the pension may have transferred as much as $600 million of state workers’ wealth to Wall Street billionaires. Inflated private equity portfolio values, or wealth transfer—either possibility should be disturbing to stakeholders, including California taxpayers who are on the hook for the dangerously underfunded pension’s promises.
With approximately $440 billion in assets, the California Public Employees Retirement System (Calpers) is America’s largest government worker pension fund, serving more than 2 million members. The pension is severely underfunded, with a funding level that plummetted in the past year from 80 percent to 70 percent. As I wrote in my recent book Who Stole My Pension? there was a time when Calpers was regarded as the best managed public pensions in the nation. Other pensions around the globe followed its lead.
Calpers was one of the first public pension systems to tie its investments to social activism, selling its investments in companies tied to South Africa’s apartheid system in 1986 and ditching tobacco stocks in 2000. The pension was a key organizer of a coalition of 225 large investors with $26 trillion in assets launched to urge corporations to reduce greenhouse-gas emissions.
Over the past decade, financial scandals and dismal investment returns have eroded its once stellar reputation.
In 2016, the former chief executive of the pension was sentenced to a prison term of 4.5 years after pleading guilty to a conspiracy charge of taking more than $250,000 in cash and other bribes from his friend and former Calpers board member Alfred Villalobos. Prosecutors said Villalobos, who killed himself weeks before he was due to stand trial, reportedly made $50 million as a middleman for investment firms looking to get a piece of Calpers business.
In the words of the Los Angeles Times in 2017:
“Credibility is an important quality for the California Public Employees Retirement System… At this moment, it hangs by a thread.”
Unfortunately, other public pensions, institutional investors, and the general public tend to believe having Calpers as a client or partner amounts to a “Good Housekeeping Seal of Approval” of the manager or investment fund. Other investors may pile into investments that are, in one way or another, seemingly sponsored, endorsed or substantially supported by the pension.
Decisions at Calpers often have a dramatic and far-reaching impact upon the world of investing. When the pension hires or supports investment managers who are unworthy stewards of capital, the nation and indeed the entire world may suffer. Calpers plays a unique role in the global investment ecosystem.
Calpers Socially Irresponsible Investments
The pension also has churned through four investment chiefs since 2009, as it has loaded-up on arguably the most complex and socially-irresponsible investments ever devised by Wall Street—costly, risky private funds which refuse to be fully transparent regarding their controversial business practices and outlandish fees. Calpers has paid an enormous price for private equity investing— transparency at the pension has plummeted, as promised above-market returns related to the asset class have failed to materialize.
Ramping Up Gambling On Private Investments
The recent Calpers private equity sale was the largest of its kind, as well as likely the biggest involving secondary sales. The $6 billion sale apparently was undertaken to facilitate even greater private equity and debt gambling by Calpers—i.e., direct purchases in private companies by the pension, as opposed to investing through private equity funds managed by firms such as Blackstone
, or Carlyle. It seems Calpers is convinced that investing billions more in private equity—this time without the “training wheels”, i.e., no assistance from Wall Street gurus—will improve its performance and funding level. That’s one hell of a roll of the dice—particularly given the rapid turnover of investment chiefs at the pension.
While it has been reported that Calpers sold its holdings at a roughly 10 percent discount to their value in September 2021, no one can know for certain since the private equity managers and Calpers have long maintained that private fund dealings can legally be withheld from public scrutiny. In short, pensioners have no right to know if their retirement savings are invested prudently in private assets, or if they just funded a $600 million wealth transfer, i.e., worker wealth transferred to Wall Street billionaires.
Chris Tobe, investment consultant and former Kentucky pension trustee doubts that Calpers’ private equity portfolio which it currently values at $40 billion-plus reflects true market value. “Private equity managers have every incentive to inflate market values—what many observers call “mark to make-believe”—because they are compensated on the value of assets under management. It wouldn’t surprise me if the entire $40 billion-plus private equity portfolio was also inflated by 10 percent.” If values are inflated, the pension may be even more underfunded than it appears.
The timing of the Calpers sale concerns Bob Smith, CIO of Sage Advisory Services which oversees $18 billion in institutional assets.
“The timing of the Calpers private equity portfolio liquidations is questionable given the historic drawdown experienced across most of the traditional and alternative asset classes year to date. As a result of this environment Calpers funded status has declined in recent months to an estimated 72%. A more dramatic decline in the funded status was avoided largely due to the sizable returns achieved in its private equity investments. Cashing in your best performing investments at significant discounts during the recent historic market lows doesn’t seem to make sense for a public pension plan with more than adequate cashflows to meet its near and longer-term obligations.”
Selling its best investments at significant discounts during historic market lows doesn’t seem to make sense to anyone… except Calpers.