{"id":887339,"date":"2022-11-17T16:52:46","date_gmt":"2022-11-17T16:52:46","guid":{"rendered":"https:\/\/jacobin.com\/2022\/11\/public-pensions-alternative-investment-private-equity-hedge-funds-real-estate\/"},"modified":"2022-11-17T16:52:46","modified_gmt":"2022-11-17T16:52:46","slug":"private-equity-is-playing-games-with-workers-pensions","status":"publish","type":"post","link":"https:\/\/radiofree.asia\/2022\/11\/17\/private-equity-is-playing-games-with-workers-pensions\/","title":{"rendered":"Private Equity Is Playing Games With Workers\u2019 Pensions"},"content":{"rendered":"\n \n\n\n\n

Public pensions with investments in private equity face severe losses amid the economic downturn. But with the industry\u2019s shady contracts and anti-transparency laws, fund managers have no obligation to disclose their real performance.<\/h3>\n\n\n
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\n Public pension funds rely on valuations provided by the managers themselves \u2014 and thanks to secret contract clauses, managers can significantly massage and inflate their numbers. (Getty Images)\n <\/figcaption> \n<\/figure>\n\n\n\n\n \n

Public pension funds benefiting nearly\u00a0twenty-six million<\/a>\u00a0Americans have invested $1.3 trillion in high-risk, high-fee \u201calternative\u201d investments like private equity, hedge funds, and private real estate that have been wracked with corruption scandals and financial misconduct. Those pension funds could soon face a reckoning, as the downturn in the stock market spreads to these alternative investments, resulting in costly reductions of their estimated value and, in turn, increased contributions from state and local governments to meet those losses.<\/p>\n

But most public pension members and beneficiaries have no way of knowing the extent of distress facing their investments. That\u2019s because public pension funds rely on valuations provided by the managers themselves \u2014 and thanks to secret contract clauses, managers can\u00a0significantly massage<\/a>\u00a0and\u00a0inflate<\/a>\u00a0their numbers.<\/p>\n

\u201cAlternative investments give pension funds the opportunity to hide their losses, which means that they are made to order for this contractionary environment,\u201d said Ted Siedle, a former attorney with the Securities and Exchange Commission who now represents financial industry whistleblowers. \u201cIt\u2019s a perfect place to hide. It\u2019s no surprise that the increase in private equity and alternative investments was accompanied by an increase in secrecy. The bottom line is nobody knows what these investments are, nobody knows how they are performing, or what they are worth.\u201d<\/p>\n

As of publication, the main stock market index is down 17.4 percent since January, the longest period of falling stock prices since the 2008 financial crisis.<\/p>\n

Public pension deals in the alternative space are notoriously opaque, with no full public disclosure of the underlying investments and accompanying contracts, the amount of debt or risk that a fund has taken on, the total fees paid to the firms involved, or the underlying performance and cash-flow data of these investments.<\/p>\n

This is in stark contrast to investments in publicly traded companies, which disclose a wide range of information about their finances and face penalties for misrepresentation.<\/p>\n

\u201cIn a general way, the whole [alternative investment] industry has been running on autopilot for the last fifteen years with almost zero regulation,\u201d said Jeff Hooke, a retired investment banker who now lectures on finance at Johns Hopkins University. \u201cThere\u2019s no cop on the beat. There\u2019s no sheriff in town. They\u2019ve been able to report, without too much scrutiny, these glowing returns.\u201d<\/p>\n\n \n\n \n \n \n

Cratering Value<\/h2>\n \n

Private equity and other alternative investments were originally peddled as vehicles that could deliver higher returns to investors, no matter the market environment, by taking over and transforming companies \u2014 often by loading them up with debt and laying off workers.<\/p>\n

Such promises helped inspire public pensions to enter the space. Forty years ago, most public pension funds didn\u2019t invest in private equity or hedge funds at all, instead pursuing far more orthodox investments in stocks and bonds. Now, public pensions have more than a trillion dollars invested in alternatives.<\/p>\n

In total, public pensions\u00a0supply<\/a>\u00a0more than a third of the capital to private equity, and they likely provide a similar share of the capital going to hedge funds and private real estate. And they are shoveling ever more money at the alternative investment industry, despite sky-high fees and returns that either meet or trail the broader markets.<\/p>\n

In part by using public pension capital, private equity in particular has expanded into every corner of the economy, from the\u00a0prison<\/a>\u00a0industry to\u00a0services<\/a>\u00a0for children with disabilities to\u00a0fossil fuels<\/a>,\u00a0housing<\/a>,\u00a0weapons<\/a>,\u00a0security<\/a>,\u00a0media<\/a>,\u00a0lobbying<\/a>,\u00a0health care<\/a>, and\u00a0veterinarians<\/a>. Their investments are rife with\u00a0bankruptcies<\/a>,\u00a0layoffs<\/a>, and\u00a0aggressive<\/a>\u00a0anti-union<\/a>\u00a0campaigns.<\/p>\n

But the outsized returns promised by the money managers themselves have not been\u00a0borne<\/a>\u00a0out by data that have found that private equity does not beat the S&P 500 index of large stocks. Hedge funds have also massively trailed the broader stock market, and private equity real estate trails publicly traded real estate.<\/p>\n

Now the repercussions of the industry\u2019s overly optimistic forecasts are starting to be felt, as their portfolios\u2019 performance begins to reflect the economic downturn.<\/p>\n

Financial reports for alternative investments typically lag by one quarter, or three months. But accounting rules also allow them to measure their value at \u201cnet asset value,\u201d determined by a\u00a0complex and subjective<\/a>\u00a0valuation process, as opposed to fair market value, or what it\u00a0would be<\/a>\u00a0worth if the pension fund tried to sell it on the open market.<\/p>\n

This problem came into view recently when the California Public Employees’ Retirement System (CalPERS), the country\u2019s largest pension fund, sold a $6 billion private equity portfolio at a\u00a010 percent discount<\/a>, or $600 million\u00a0less<\/em>\u00a0than what the agency had valued the portfolio at in its public financial filings.<\/p>\n

Eileen Appelbaum, codirector of the Center for Economic and Policy Research and coauthor of\u00a0Private Equity at Work<\/em>,\u00a0<\/em>said that the CalPERS write-down is indicative of broader problems in the industry. \u201cA lot of the info you\u2019re getting from the fund managers have a lot of guesstimates in it,\u201d she said. \u201cPublic markets have been declining since January. The industry wants to make the case that they don\u2019t decline like that, that they are way less volatile.\u201d<\/p>\n

Appelbaum, for one, isn\u2019t buying it. \u201cThe official private equity returns at the end of the second quarter were down 4 percent,\u201d she said. \u201cPublic equities are down 18 percent and private equity down 4 percent? It\u2019s just not believable.\u201d<\/p>\n\n \n \n \n

An Industry Built on Secrecy<\/h2>\n \n

The alternative investment industry is built on a lack of transparency. The risks inherent in the space mean that managers have great incentive to create rosier returns. Poor return numbers make it harder to raise money for new investments. It\u2019s why investment managers work to shield information about themselves and their activities from public view, so they are free to peddle stories of outsize returns with no accountability.<\/p>\n

Now that same secrecy will keep the true dangers currently facing these investments from going public.<\/p>\n

Industry lobbyists have successfully pushed\u00a0anti-transparency<\/a>\u00a0bills<\/a>\u00a0across the country exempting contracts and raw performance data from public view. To this day, only a small handful of contracts between alternative investment managers and public pension funds have been released to the public, and none of the raw performance data from these investments have been disclosed.<\/p>\n

The contracts that have been made public have revealed many hidden fees, plus a variety of provisions that aggressively tilt the playing field in favor of alternative investment managers. Those include\u00a0clauses<\/a>\u00a0like a\u00a0waiver<\/a>\u00a0of the managers\u2019 fiduciary duty to the pension, which limits the firms\u2019 legal obligation to act in the pension\u2019s best interest. Contracts also include provisions requiring binding arbitration for any disputes, eliminating the ability of pensions to seek redress in the courts.<\/p>\n

What\u2019s more, there is little incentive for public pension trustees to push for greater transparency, since plan managers are typically\u00a0unpaid<\/a>.\u00a0Moreover, the little education they receive on such investments is typically from consulting firms with\u00a0deep ties<\/a>\u00a0to the industry or at industry-sponsored conferences filled with industry representatives. Numerous state treasurers and other politicians with oversight over pensions also have deep ties to Wall Street, like Republican Virginia governor Glenn Youngkin, a former Carlyle Group\u00a0executive<\/a>\u00a0who makes\u00a0appointments<\/a>\u00a0to the state pension fund\u2019s board.<\/p>\n

No wonder, then, that there are very few pension trustees raising concerns about the rapid growth and risks surrounding alternative investments. One notable exception is Pennsylvania state senator Katie Muth, who has played a\u00a0leading role<\/a>\u00a0in disrupting business as usual at a more than $70 billion pension fund that has been plagued by scandal in recent years. (Muth\u00a0won<\/a>\u00a0reelection to the state senate on November 8, and is a legislative representative on the pension fund\u2019s board.)<\/p>\n

President Joe Biden\u2019s Securities and Exchange Commission has proposed\u00a0modest<\/a>\u00a0reforms to the industry that would require increased transparency on performance, risk, and fees in the alternative investments space. But these reforms have been\u00a0fiercely opposed<\/a>\u00a0by the industry.<\/p>\n

Massachusetts senator Elizabeth Warren has proposed a much broader set of major reforms to the industry in the\u00a0Stop Wall Street Looting Act<\/a>, which among other things would rein in the amount of debt taken on by the industry and require new disclosures around fees and performance.<\/p>\n

But considering the financial industry spent\u00a0more than<\/a>\u00a0$340 million in the 2022 elections, the legislation faces an uphill battle in Congress. The private equity and investment industry has spent\u00a0more than $13.8 million<\/a>\u00a0in lobbying in Washington this year alone.<\/p>\n

Will the coming crisis in declining values in the industry trigger increased scrutiny? Hooke isn\u2019t so sure.<\/p>\n

\u201cThings might change in a few months when people start to see red ink,\u201d he said. \u201cThe SEC has been totally off the radar when it comes to supervision and enforcement of the industry. With the coming downturn, there might be a cry for a closer inspection of the business by appropriate authorities. But the dark side is very powerful. They\u2019ll pull out all their lobbyists and lawyers.\u201d<\/p>\n\n \n \n \n\n \n \n

You can subscribe to David Sirota\u2019s investigative journalism project, the\u00a0Lever<\/i>,\u00a0here<\/a>.<\/p>\n\n\n\n

This post was originally published on Jacobin<\/a>. <\/p>","protected":false},"excerpt":{"rendered":"

Public pension funds benefiting nearly\u00a0twenty-six million\u00a0Americans have invested $1.3 trillion in high-risk, high-fee \u201calternative\u201d investments like private equity, hedge funds, and private real estate that have been wracked with corruption scandals and financial misconduct. Those pension funds could soon face a reckoning, as the downturn in the stock market spreads to these alternative investments, resulting [\u2026]<\/p>\n","protected":false},"author":138,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"_links":{"self":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/887339"}],"collection":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/users\/138"}],"replies":[{"embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/comments?post=887339"}],"version-history":[{"count":1,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/887339\/revisions"}],"predecessor-version":[{"id":887340,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/887339\/revisions\/887340"}],"wp:attachment":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/media?parent=887339"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/categories?post=887339"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/tags?post=887339"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}