Investors’ appetite for attractive new stocks appears to have paid off for Thomas Tull, a billionaire tech investor and Steelers part-owner, by more than $20-$1, while quadrupling the PSERS pension fund’s investment — if it can cash out its shares at today’s bullish prices.
Early private investors typically face a “lock-up” period, often six months, before they can sell all shares. The stock could gain value or crash before the shares are sold.
Still, a big Figs payday would be a boost to beleaguered PSERS chief investment officer James Grossman. His team’s complex and often secretive investments have been criticized by a growing reform faction of PSERS trustees who say the fund could do better in low-cost index funds.
The search for high returns takes many pension funds far and wide, but the Pennsylvania teachers’ fund went farther than most. It invested in trailer park chains, pistachio farms, pay phone systems for prison inmates — and, in a particularly bizarre twist, loans to Kurds trying to carve out their own homeland in northern Iraq.
Now the F.B.I. is on the case, investigating investment practices at the Pennsylvania Public School Employees’ Retirement System, and new questions are emerging about how the fund’s staff and consultants calculated returns.
The error in calculating returns was a tiny one, just four one-hundredths of a percentage point. But it was enough — just barely — to push the fund’s performance over a critical threshold of 6.36 percent that, by law, determines whether certain teachers have to pay more into the fund. The close call raised questions about whether someone had manipulated the numbers and the error wasn’t really an error at all.
“If you can’t change the benefits, and you can’t change the contributions, the only lever left for these people to pull is investment policy — that’s it,” said Kurt Winkelmann, a senior fellow for pension policy design at the University of Minnesota’s Heller-Hurwicz Economics Institute. “And that exposes younger beneficiaries and taxpayers to a lot of risk.”
Private equity investments underperformed broad US stock indexes for the fiscal year that ended June 30, 2020. Importantly for taxpayers and governments, this underperformance of private equity weighed down public pension system asset returns during a particularly difficult year for investments.
These investment results may mark the beginning of the end of superior private equity returns that have characterized early 21st century institutional investing. If private equity returns have now fallen “back to earth,” many public pension systems can expect heightened scrutiny over their allocations to this asset class and the high investment costs that go with it.
About 1,000 current and retired Ohio educators skeptical of the true financial shape of their $90 billion state pension fund are preparing to sue to force greater cooperation with a $75,000 self-funded investigation of its books.
The forensics audit, financed through money raised from members, is being undertaken by pension investment expert Ted Siedle — a former Securities Exchange Commission attorney, financial forensics investigator, and co-author of the book “Who Stole My Pension?”
The public records lawsuit will ask the Ohio Supreme Court to force the State Teachers Retirement System, serving some 500,000 active, inactive, and retired members, to release information that investment firms have claimed is proprietary or a trade secret.
The article points out that the PSERS investment office regularly violates state travel policies, which require employees on Commonwealth business to hew to Federal guidelines for airfare and lodging. Eight PSERS officers have been granted waivers from this policy.
PSERS defends the travel costs by saying staff traveled business class and the fares were typically refundable and sometimes bought at the last minute.
My issue isn’t with the cost of the flights but their necessity, and with the hotel costs. Public servants should be staying in Westin/Marriott level rooms. These prices are consistent with five star hotels, like the Four Seasons or St. Regis in New York City.
The term shadow bank refers to things like hedge funds, venture capital firms, and private equity, which all have relatively less oversight than traditional financial institutions. These are all lending intermediaries, or institutions that lend money that fall outside of the mainstream regulatory structure of finance. They’re either situated outside of investment banks, or they exist in less regulated arenas of investment banks, perhaps in offshore settings. One example you might be familiar with is the big private equity firm Blackstone. Another is the big hedge fund Bridgewater.
The “shadow” label implies a degree of opacity, because frequently they make investments that are harder to understand, often in private markets rather than public markets. But it also refers to the fact that they’re lending in the shadow of larger institutions. This partially because they’re deemed to have sophisticated investors by the Securities and Exchange Commission and are therefore designated as subject to less oversight.
Author(s): Megan Tobias Neely interviewed by Meagan Day
CEM, using a simple mix of small-cap indexes, found that even though private equity funds deliver what looks to be outsized raw returns, they fall short of CEM’s benchmark since 1996. However, as we’ve also said for some time, the big exception is investing in house, which CEM calls “internal direct”. And the worst, natch, is fund of funds, which have an extra layer of fees.
There are two additional reasons the CEM findings are deadly. First, the time period they look at, going back to 1996, includes a substantial portion of the 1994-1999 “glory years” where private equity firms were coming back from a period of disfavor after the late 1980s leveraged buyout crash. Less competition for deals meant better buying prices and better returns. Alan Greenspan dropping interest rates for a full nine quarters after the dot-com collapse was the first episode of the Fed driving money into high risk investment strategies by creating negative real returns for a sustained period, and the rush of money into private equity elevated deal prices.
PSERS is trying to depict the performance overstatement as an error but its body language says otherwise. It has launched an investigation of its three top staff members and has gone from denying that PSERS has any information that anything criminal had taken place to ducking the question.
The Inquirer described how three of PSERS’ 15 board members voted against a staff effort to say the return numbers were fine after some sort of not fully disclosed brouhaha with an outside consultant.
The “impact on PSERS tax exempt status” is alarming, and it’s frustrating that the article does not probe what the issue might be.
Needless to say, expect more shoes to drop as the FBI keeps digging. A friend who was the DA for Bridgeport, the most corrupt city in Connecticut, said the FBI aren’t the brightest bulbs but are relentless and as a result generally take down their targets.
What a remarkable coincidence that New York City Comptroller Scott Stringer is looking to loosen strict rules that govern private-equity firms managing the city’s pensions when the Democrat is running for mayor in this year’s election. Presumably, private equity firms who may earn hundreds of millions in fees if the pension restrictions are lifted will let him know just how grateful they are.
For decades, authorities and experts have tried restricting excessive borrowing by private equity investors, since it’s been repeatedly shown that they leave lots of bankruptcies in their wake. And these abuses continue because private equity looting fee structures result in general partners making out handsomely whether or not the business does well. In 1987 (no typo), the Treasury proposed limiting the deduction of interest on highly leveraged transactions. That idea went by the wayside thanks to the 1987 crash. Other proposals to restrict debt levels have similarly not gone anywhere. Yet now an important ruling looks set to deliver where regulators and legislators have failed.
The decision is related to bankruptcy ruling, In re Nine West LBO Securities Litigation, in early December. I’m late to it; several readers called it to my attention via a William S. Cohan op ed in the New York Times, The Private Equity Party Might Be Ending. It’s About Time. I think Cohan is overstating its significance; investment bankers and lawyers are prone to howling loudly about anything that might reduce the size of their meal tickets while working full bore to preserve them. But Nine West does appear likely to restrict very highly leveraged deals by pinning the liability tail for likely insolvencies on the directors and officers of the selling company.
The very short version of this story is that the directors of the selling company approved a sale transaction that they knew would saddle the company, renamed Nine West, with more debt than its own bankers had said it could support while removing its best assets. They sat pat as the buyer revised the deal to load even more borrowings on the acquisition, despite having a fiduciary “out” clause.
Scott Stringer is worried. New York City pension funds are having a tough time enlisting private equity (PE) firms due to a requirement that PE outfits pay for litigation expenses out of their own pockets instead of shunting the cost onto investors.
So, as the city official overseeing the funds, City Comptroller Stringer is urging fund trustees to scrap this rule, which would help the buyout firms if they run into trouble with regulators or other litigants, as first reported by the New York Post. The idea is to get more PE players managing city pension money.
The New York City Public Pension Funds, the collective of the city’s five pension funds, implemented the private equity rule, called the “GP Expenses Provision,” roughly five years ago after Carlyle Group was swept up in a collusion case and had to pay a $115 million settlement, the Post reported.