Pension fund big earner becomes political issue

Mitt Romney’s presidential campaign is putting the spotlight on private equity, which public pension funds such as CalPERS and CalSTRS helped flourish and now need for better-than-average earnings.

Romney became wealthy while leading Bain Capital, a private equity firm he said created “tens of thousands of jobs” by buying and then selling troubled or stagnant companies after making them efficient, better managed and able to grow and prosper.

But conservative Republican candidates, Newt Gingrich and Rick Perry, accuse Romney of “looting” corporations and “vulture” capitalism, enriching a few while leaving a trail of layoffs, massive corporate debt and bankruptcies.

Public pensions can play a key role in leveraged buyouts. A private equity firm puts up a token amount, gets a larger down payment from a pension fund or other limited partner and borrows most of the money, using the takeover target’s assets as collateral.

“Private equity owes its explosive growth largely to America’s pension funds,” a New York Times story said in April 2010. “Buyout funds raised $200 million in 1980 and $200 billion in 2007. According to Prequin, a financial data provider, public pension funds were the biggest contributors over that period and now have $115.9 billion invested in private equity.”

Private equity is expected to yield more than stocks, often 3 percent or more above market. Higher private equity yield is part of the rationale for the CalPERS and CalSTRS earnings forecast, 7.75 percent, which critics say is too optimistic and conceals debt.

After CalPERS and CalSTRS lost a third or more of their investment funds during a deep recession and stock market crash, a combined loss of about $170 billion, they both responded by shifting more of their investments into private equity.

The California Public Employees Retirement System, after investments plunged from $260 billion in fall 2007 to $160 billion in March 2009, increased its private equity target from 10 to 14 percent of the portfolio. The fund was $226.5 billion last week.

The California State Teachers Retirement System, which fell from $180 billion in October 2007 to $112 billion in March 2009, increased its private equity target from 9 to 12 percent of the portfolio. Its fund was $146 billion on Nov. 30.

In what Romney and some economists call “creative destruction,” private equity firms can impose tight cost controls as well as layoffs when trying to restructure companies for future success.

Public pension boards, dominated by public-sector labor union representatives, can be in the uncomfortable position of having a private equity partner accused of unfairly squeezing private-sector unions to boost profits.

CalPERS and CalSTRS have received at least two appeals in recent years to use their ownership clout to aid labor in struggles with private equity firms — Blackstone at the San Francisco Hilton hotel and TowerBrook at Bevmo! alcoholic beverages stores.

The scramble for pension fund seed money during a private equity boom that peaked around 2007 led to a corruption scandal at CalPERS.

Private equity firms agreed to pay the “placement agent” firm of a former CalPERS board member, Al Villalobos, more than $50 million in fees for help in obtaining funds from CalPERS.

A private equity firm led by Gerald Parsky agreed to pay Villalobos $4 million. Parsky chaired the Commission on Public Employee Post-Employment Benefits, which found few major pension problems and focused on unfunded retiree health obligations.

The state attorney general filed a bribery-related civil lawsuit in May 2010 against Villalobos and a former CalPERS chief executive, Fred Buenrostro. A trial for Buenrostro has been set for May. A Villalobos trial is expected later this year.

As of last Sept. 30, the performance of the CalPERS private equity program was 28.4 percent for one year and 8.9 percent for 10 years, according to a quarterly report to the board last month from Pension Consulting Alliance.

About half of the private equity portfolio was in leveraged buyouts, the type of private equity for which Romney is criticized. The rest are labeled special situations, fund of funds, growth equity and venture capital.

CalPERS had $55.5 billion committed to its private equity portfolio, called Alternative Investment Management. But $14.1 billion of the commitments had not yet been funded as the private equity firms looked for opportunities.

In an industry trend, CalPERS private equity investments fell after the global financial crisis in 2008. Commitments peaked at $14.2 billion in 2007 (27 percent still unfunded), dropping to $700 million in 2010 before climbing again last year.

Since the CalSTRS private equity program began in 1988 the “net internal rate of return” was 14.5 percent as of last March 31, said a semiannual report given to the board in September. The one-year performance was 19.6 percent, ten years 10.3 percent.

CalSTRS had $40.3 billion committed to private equity, $31.5 billion actually contributed. A larger part of the CalSTRS portfolio than CalPERS’ is in leverage buyouts: about 70 percent of the private equity market value.

Unlike the CalPERS report, the private equity holdings listed in the CalSTRS report include Bain Capital, a $625 million commitment. Romney left Bain in 1999 to take charge of the troubled winter Olympics in Salt Lake City.

Romney received part of Bain profits for the next decade during a leveraged buyout boom, the New York Times reported last month. From $4 billion in assets and 100 employees in 1999, Bain grew to $66 billion and 900 employees in six countries.

If Romney becomes the Republican presidential nominee, the debate over private equity and leveraged buyouts is expected to remain an issue — this time pushed by Democrats and the re-election campaign of President Obama.

“The controversial nature of buyouts is one that has long been absent from the political debate,” a Wall Street Journal article said last week. “Private equity is a $2.4 trillion industry, with another $1 trillion in unspent funds lurking on the sidelines.“

Battles may be brewing over continuing to tax private equity fees at a low capital-gains rate (15 percent rather than a much higher income tax rate) and a part of the Dodd-Frank financial reform act that limits bank participation in private equity.

An industry group, the Private Equity Growth Capital Council, reportedly is preparing to combat criticism triggered by Romney’s candidacy with an advertising and public relations campaign.

“We were bracing ourselves for this, but we’re not even in the general election yet,” a senior private equity executive told the New York Times. “Expect more pain.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 16 Jan 12

6 Responses to “Pension fund big earner becomes political issue”

  1. Al Moncrief Says:

    Private equity plays a key role in capitalism. I’m sick of conservatives, including Perry and Gingrich bashing private equity and capitalism. Calpers should continue to invest in private equity if they see significant opportunities for capital gains, similar to any investor.

  2. Dr. Mark H. Shapiro Says:

    Ed never misses a chance to bash CalPERS and CalSTRS. There is a difference between venture capital and vulture capital. Not all leveraged buyouts fall into the vulture capital category. It depends on whether the aim is to turn a company around and to make it profitable, or the aim is to loot the company and leave the bond-holders holding worthless paper. In addition, a good part of the investment in private capital goes to funding start-up companies.

    I’m sure Ed would find a way to bash the pension funds for NOT investing in private capital if that were their policy.

  3. SeeSaw Says:

    The author, here, is trying to make it look like the placement agent-scandal was CalPERS-created. It was not. It was Villalobos-created.

    You, author, can see that the CalPERS BOD is not union dominated. You are as bad, as some of the clueless posters, who are nothing but union haters.

  4. FLAK88 Says:

    Private Equity is an established form of capital. Gingrich and Perry are simply using some ‘new found’ information to use against a political opponent. I’m sure if one digs (and not very far), both of these guys have a history of making a few bucks themselves. Just the normal USA political process in action …

  5. The Ted System Says:

    wow– this is all a non issue in my view—–

  6. spension Says:

    The problem is… it is always efficient to purchase a company and offshore much of its labor to countries where $1 day is a good age. I’ve personally seen it happen.

    A part of the reason why our private sector has seen vast wage/benefit concessions, while our public sector has seen much less, because we generally can’t offshore the public sector jobs.

    Or the defense manufacturing, since we don’t want China making our drones, jet fighters, subs, etc.

    The curious thing is seeing the big public pension funds providing capital to offshore the private sector jobs… well, that activity comes back and bites the public sector because now the perks of the public sector look outlandish to the diminished US private sector workers….

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