Sunday, August 30, 2015

CalPERS Can’t Explain Private Equity: I had to write about it

CalPERS Can’t Explain Private Equity: I had to write about it

After several years of writing about the severe imbalances inherent in the money management industry, I decided to devote my energy to my artistic endeavors.  However, Yves Smith of Naked Capitalism  ( has drawn me back to important and disturbing developments at CalPERS.  For many months, Naked Capitalism has painstakingly documented the inability of CalPERS staff to furnish its own trustees with data about the total expenses incurred within its private equity portfolio.  In order to unearth this significant failure, Yves Smith has had to endure lengthy videos of CalPERS’s investment committee meetings.  While CalPERS provides an unusual level of disclosure in streaming these meetings on the Internet, Naked Capitalism is the only one taking a critical look at the interactions between CalPERS’s trustees and staff.

In the last two days at Naked Capitalism’s suggestion, I have listened to Ted Eliopolis, Chief Investment Officer and Real Desrochers, Managing Investment Director of Private Equity conduct a tutorial on management fees and carried interest.[1]  The video also includes a lengthy colloquy between the staff and trustees on the subject. 

I’ll leave it to Naked Capitalism to chronicle the many errors, omissions, and evasions in the staff’s presentation and responses.[2]    As I watched the staff for the better part of two hours, I could only think that CalPERS shouldn’t have $30 billion in exposure to private equity and probably upwards of $45 billion in future commitments.  The senior staff of the world’s largest public fund cannot readily explain the basics of private equity investing and doesn’t demonstrate mastery over its investment portfolio.  As I listened to Mssrs. Eliopolis, and Desrochers I heard lots of platitudes about transparency, due diligence, and alignment of interest, but very few specifics.  Although CalPERS has been investing in private equity for decades, I heard comments and questions from the trustees (and these are the trustees on the Investment Committee) that I would have expected from a public pension plan that had never invested in private equity before.  Moreover, when one or two trustees asked pointed questions, it seemed as if the senior staff was doing a fine impression of evasive private equity executives instead of acting as a staunch stewards of a public pension.

A major portion of CalPERS’s assets is committed to private equity, and those assets are expected to make a significant contribution to meeting the pension’s expected return of 7.5%.  In my view, CalPERS doesn’t have the management wherewithal to oversee the allocation, performance, or risk of the private equity portfolio and should stop investing until they have the required leadership. 

This video ought to go viral.  California’s state employees and retirees should be downloading this investment meeting and passing it along to their colleagues.  Instead only about 65 people, including Yves Smith, have watched.    Someone without any investment experience would quickly recognize that CalPERS is ill-equipped to handle any exposure to private equity, let alone $30 billion worth of the stuff.

PS:  While I’m back in the business of critiquing the investment business, let me also comment on a letter sent by various public pension plans, including CalPERS and North Carolina, to the SEC.   Written in late July, the letter asks the SEC to require private equity managers to make adequate disclosure of fees and expenses.  For a detailed analysis, you can read Naked Capitalism’s comment last month.[3]  Suffice it to say, that these pensions are asking the SEC to do the job that the pensions should be doing themselves.  Rather than get tough on private equity managers, the public pensions want the SEC to do the hard work for them.  I’m not sure the SEC has the authority.  Moreover, it’s not the role of the SEC to help out “sophisticated investors” with their due diligence.  Then again, as the previously referenced videos make clear, the world’s biggest public pension plan doesn’t exhibit much in the way of sophistication.


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