Tag: private equity

Ohio Teachers’ Pension Increases Alts and Fixed Income Targets, Decreases Public Equities

Mary Pat Campbell

Link: https://www.ai-cio.com/news/ohio-teachers-pension-increases-alts-and-fixed-income-targets-decreases-public-equities/

Excerpt:

The State Teachers’ Retirement Board of Ohio shifted its asset mix at its board meeting last week, announcing it will now target 26% of its assets to U.S. equities, down from 28%. It also decreased its international equity allocation to 22% from 23%. The fund increased its allocation to private equity to 9% from 7% and its allocation to fixed income to 17% from 16%.

The increase in private equity, which had record returns this past year, is part of a broader trend. STRS Ohio saw 29% returns in fiscal year 2021, in part driven by a 45% return on alternative assets. These returns were topped only by domestic equities, which returned 46.3% for the fund.

The pension plan is also beginning to share some of these returns with pension beneficiaries. At its board meeting last week, the pension approved a 3% one-time cost-of-living increase for beneficiaries who retired before June 1, 2018.  The 3% adjustment is still less than half of the Bureau of Labor Statistics’ official inflation calculation of 7% in 2021.

Author(s): Anna Gordon

Publication Date: 22 Mar 2022

Publication Site: ai-CIO

DiNapoli: State pension fund adds $350 million to investment funds geared to New York companies

Mary Pat Campbell

Link: https://www.wnypapers.com/news/article/current/2022/06/14/151309/dinapoli-state-pension-fund-adds-350-million-to-investment-funds-geared-to-new-york-companies

Excerpt:

The New York State Common Retirement Fund is committing another $350 million to two investment funds through its in-state private equity investment program, fund trustee and state Comptroller Thomas P. DiNapoli recently announced.

“The in-state program has helped hundreds of New York businesses add and retain thousands of jobs and grow while achieving solid returns for the retirement system members and their beneficiaries that rely on the pension fund for their retirement security,” DiNapoli said. “We’ve committed more than $2 billion through this program to invest in New York state companies, and I’m proud to continue building on our successful track record.”

The fund will provide $50 million in additional capital to the Hudson River co-investment fund III, which it already invests in, and another $300 million in the new Hudson River co-investment fund IV. The funds make equity co-investments (investments alongside a lead sponsor) in growing New York-based companies.

Author(s): Thomas P. DiNapoli

Publication Date: 14 Jun 2022

Publication Site: Niagara Frontier Publications

The private equity industry in the new interest rate environment

Mary Pat Campbell

Link: https://voxeu.org/article/private-equity-industry-new-interest-rate-environment

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Excerpt:

First, the illiquid and long-term nature of the private equity asset class, significant dispersion in returns across funds, as well as bilateral and relationship-driven fundraising, creates scarcity in access to individual funds, giving private equity funds the bargaining power when splitting the returns. As the industry’s growth deaccelerates, the pendulum of bargaining power will start to shift to limited partners, but more permanently than what we saw during the GFC. 

Second, we will see larger scrutiny of the cost structure and the industry’s value-add. Put simply, it is an expensive asset class, with the net returns to limited partners lacking consistency in beating public benchmarks (e.g. Harris et al. 2014).3 A central tension is large funds’ management fees, which typically run at 1.5% to 2% of committed capital already in the first five years of the fund life.4 This structure is lucrative for managers but underscores the disconnect between the private equity firm’s income stream and its fund performance, especially for large funds. 

Third, such pressures would make new and smaller funds particularly vulnerable. The proliferation of new funds, especially generalists’ funds, in the past decade was partly explained by the strength of capital flow and investment managers’ desire to capture a more significant share of fund economics. These funds have a higher embedded cost structure. Larger funds, therefore, have more room to compress the fees and have a higher ability to experiment in the investment space. All this gives larger-scale firms a better chance to withstand adverse pressures, resulting in market consolidation.

Author(s): Victoria Ivashina

Publication Date: 24 Feb 2022

Publication Site: VoxEU

NAIC Rejects Need for Federal Help With Private Equity-Owned Life Insurers

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2022/06/02/naic-rejects-need-for-federal-help-with-private-equity-owned-life-insurers/

Excerpt:

State regulators are not seeking help from Washington with monitoring those private equity firm owners, the officers of the National Association of Insurance Commissioners wrote in a public letter sent to Brown earlier this week.

Brown is the chairman of the U.S. Senate Banking, Housing and Urban Affairs Committee.

The NAIC officers told Brown that U.S. life insurers have been writing complicated products and using large, complicated investment strategies for some time.

“Our system has experience at assessing and understanding this dynamic through market highs and lows,” the regulators said. “State insurance regulators are fully capable of assessing and managing the risks of these insurers, and there is nothing PE firms add to the playing field that changes this fact.

Author(s): Allison Bell

Publication Date: 2 June 2022

Publication Site: Think Advisor

New York City Wants to Amp Up Risk in Workers’ Pensions

Mary Pat Campbell

Link: https://www.wsj.com/articles/new-york-city-wants-to-amp-up-risk-in-workers-pensions-11650976985

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Excerpt:

New York City’s comptroller is the latest public official trying to change laws aimed at limiting risk in pension investments, as U.S. state and local pension funds try to plug shortfalls in a low-return environment.

Comptroller Brad Lander, who oversees about $260 billion in retirement money for city police, firefighters, teachers and other public workers, is asking New York lawmakers for more flexibility to invest in private markets, high-yield debt and foreign stocks. The state comptroller’s office, which supervises another $280 billion in retirement assets, views the idea favorably, with a representative saying such flexibility “is key in times of market volatility.”

Pension funds, like household investors, are facing a relatively bleak environment for stocks and bonds, the bread and butter of a traditional retirement portfolio. In the face of historic inflation and Federal Reserve efforts to contain it, these funds are finding they can no longer rely on bonds to rise when equities fall and vice versa. In the first quarter, the S&P 500 returned minus 4.6% while the Bloomberg U.S. Aggregate bond index returned minus 5.93%.

“Those two things taken together is what’s scary: the prospect of both going down at the same time,” said Steve Foresti, chief investment officer at Wilshire Associates, which advises large public pension funds. Retirement portfolio managers, he said, are asking “in that environment, do I have anything that actually goes up?”

Author(s): Heather Gillers

Publication Date: 26 April 2022

Publication Site: WSJ

How Much Private Equity Is Too Much for a Public Pension?

Mary Pat Campbell

Link: https://www.ai-cio.com/in-focus/shop-talk/how-much-private-equity-is-too-much-for-a-public-pension/

Excerpt:

Pension funds around the U.S. are upping their allocations to private equity after a year of record-breaking returns. According to data obtained from Preqin, the average public pension’s allotment to private equity increased to 8.9% in 2021. In contrast, the average allocation was just 6.5% in 2012.

New York City’s pensions are among those that may see an increased allocation to the asset class in their portfolios should a new law pass. Currently, New York State implements a “basket clause,” which prevents public pensions from investing above 25% of their total portfolios in investments considered higher risk, including real estate, infrastructure, hedge funds, international equities, and private equity. The proposed law would increase that allocation to 35% for all pension funds in the state. If the law passed, the boards of New York City’s five public pensions would vote on whether to increase the “basket” for their own pension funds.

New York City Interim CIO Michael Haddad, who is responsible for overseeing investments in the five pension plans across the city, says that while the change in the law isn’t targeted at private equity exclusively, it’s likely that the asset class would increase.

Author(s): Anna Gordon

Publication Date: 10 May 2022

Publication Site: ai-CIO

Putin, Russian Pals “Mystery” Partners In Public Pension Deals?

Mary Pat Campbell

Link: https://www.forbes.com/sites/edwardsiedle/2022/03/10/putin-russian-pals-mystery-partners-in-public-pension-deals/?sh=3057aa8524af

Excerpt:

America’s state and local government pensions invest as much as 40 percent of their assets in secretive, offshore “alternative” hedge, private equity, real estate and venture funds which warn that certain unidentified “mystery investors” pay lower fees, are provided greater information about investment strategies and portfolio holdings, have been granted liquidity preferences and receive superior net performance—all at the expense of America’s public sector workers. How many wealthy Russians are “mystery investors” in these pension deals which, according to an internal FBI document leaked last year, criminals and foreign adversaries regularly use to launder money? Wall Street refuses to say and public pensions have promised not to ask. Ironically, the invasion of Ukraine and calls to dump Russian investments to punish the country are drawing attention to the ugly fact that America’s public pensions have long consented to being kept in the dark by Wall Street, abrogating their duty to monitor and safeguard workers’ retirement savings.

….

For example, my second investigation of the Rhode Island state pension revealed in 2015 that contrary to the pension’s financial reports, 40 percent of the pension’s investments—not the 25 percent disclosed—had been allocated to secretive alternative investments.

….

It’s no secret that the FBI suspects that many alternative investment vehicles are widely utilized for money laundering. In 2019, the FBI compiled a report titled “Financial Crime Threat Actors Very Likely Laundering Illicit Proceeds Through Fraudulent Hedge Funds and Private Equity Firms to Obfuscate Illicit Proceeds.” Then, a leaked May 1, 2020 internal FBI report similarly titled “Threat Actors Likely Use Private Investment Funds to Launder Money, Circumventing Regulatory Tripwires” purported to supplement the January 2019 report “by providing recent reporting of hedge funds and private equity firms used to launder illicit proceeds, and expands the threat context beyond financial threat actors to include foreign adversaries.”

Author(s): Edward Siedle

Publication Date: 10 Mar 2022

Publication Site: Forbes

Suggested reforms for Pennsylvania’s Public School Employees’ Retirement System

Mary Pat Campbell

Link:https://reason.org/commentary/suggested-reforms-for-the-pennsylvania-teacher-pension-system/?utm_medium=email

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Despite realizing excellent investment returns in 2021, industry capital market forecasts continue to suggest persistently volatile near-term investment returns that stand to only add to over $1 trillion in current pension funding shortfalls. Most near-term investment outlooks we’ve seen from pension boards across the country predict anywhere from a 6.0 percent-6.3 percent return over the next 10 years. PSERS’ assumed rate of return was recently lowered and currently sits at 7 percent.*

PSERS’s investment outlook is similar to these broad projections. Figures 1 and 2 present the results of the Monte Carlo simulation analysis developed by the Pension Integrity Project. This iterative analysis uses 10,000 simulations of PSERS’s asset performance over 20 years, considering expected returns and volatilities of plan assets, to generate both probabilities of hitting certain returns and expected return distributions.

These findings suggest that PSERS is not likely to achieve even a 6 percent average return over the next 10-15 years—much less its current assumed return of 7 percent. This suggests there is a high probability that the public pension plan’s unfunded liabilities could get worse, not better, in the near-to-mid term. This underperformance—relative to the plan’s own return rate assumptions—will make the system’s long-term solvency challenges even larger.

Author(s): Jordan Campbell, Ryan Frost

Publication Date: 11 Oct 2021

Publication Site: Reason

SEC Set to Lower Massive Boom on Private Equity Industry

Mary Pat Campbell

Link:https://www.nakedcapitalism.com/2022/02/sec-set-to-lower-massive-boom-on-private-equity-industry.html

Excerpt:

In a matter of fact, understated manner, the SEC document makes clear that its enforcement regime has not succeeded in getting private equity fund managers to stop or at least considerably reduce their abuses. Recall that in 2014, then enforcement chief Andrew Bowden gave a peculiarly titled speech, Spreading Sunshine in Private Equity. The SEC has just started its initial examinations of private equity firms. Bowden said that the SEC had found serious abuses in more than half of the firms examines, including what in other circles would be called embezzlement. Bowden also said if anything the misconduct was more prevalent at the biggest firms, which was the reverse of what it found in other areas it regulated, where the crooked operators were normally boiler-room level.

This promising start quickly fizzled out. Yes, the SEC did engage in a series of enforcements actions, targeting common abuses like charging “termination of monitoring fees” which had never been contemplated in the fund agreements, and hauling up big name firms like Apollo, KKR, and Blackstone. However, this amounted to enforcement theater. The SEC acted as if “one and done,” citing particular firms for an isolated abuse, when all the big players were certain to have engaged in many others, and then acting as if everyone would shape up, was either craven or willfully blind. Bowden immediately turned to giving speeches on how private equity firms were obviously upstanding and wanted to do right. He then gave a speech at Stanford at a private equity conference where went on far too long about how he wanted his son to work in private equity and an audience member immediately said he wanted to hire him. Bowden left the agency in three weeks.

This SEC letter, by contrast, makes clear that the agency has ample evidence in its files of continued abuses by private equity fund managers. It does not mention a particularly egregious general strategy: of admitting in the annual disclosure documents, the Form ADV, that the private equity fund managers are violating their contracts with investors. Admitting a contractual violation does not cure it, but the private equity barons appear to believe they can create their own alternative reality. And until Gensler showed up, that belief looked to be correct.

Author(s): Yves Smith

Publication Date: 10 Feb 2022

Publication Site: naked capitalism

Maryland is wasting its pensioners’ money

Mary Pat Campbell

Link:https://www.washingtonpost.com/opinions/2022/02/04/maryland-is-wasting-its-pensioners-money/

Excerpt:

Seven hundred and forty-four million dollars. That is the amount of Wall Street fees paid by the Maryland state pension plan for investment advice in fiscal 2021.

Over the past 10 years, the fees totaled roughly $4.5 billion, or about 15 percent of the plan’s earnings. For that kind of money, you would think the state gets only the prime stock and bond picks from its advisers, but, during that time, Maryland, as with most other states, failed to beat the returns of a simple 60 percent stocks/40 percent bonds index. Many large institutional investors, including public pension plans, use this 60/40 index as a barometer to gauge their portfolios’ results. They structure their portfolios to avoid a 100 percent exposure to the sometimes volatile stock market. If their results are better than the index for a given year, they claim success. Many mutual funds attract smaller individual retail and 401(k) retirement accounts by copying the index and charging low fees for passive management.

….

This drainage damages the financial security of public workers in Maryland and other states, and it forces greater taxpayer contributions to the plans. The ongoing situation has a secondary effect as well: The massive wealth transfer — from public workers and average taxpayers — to a small coterie of Wall Street money managers fosters a new plutocracy, successful at obscuring the problem and blocking reform.

The obvious fix for public plans is to shift from expensive fee investments to low-fee indexing, a tactic endorsed by none other than Warren Buffett, the noted value investor and philanthropist. For large public plans, including Maryland’s, this shift, if implemented, would be gradual. Extricating the fund from its long-term contractual commitments and replacing them with passive investments is going to take time.

Author(s): Jeff Hooke

Publication Date: 4 Feb 2022

Publication Site: Washington Post

Why private equity sees life and annuities as an enticing form of permanent capital

Mary Pat Campbell

Link: https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-private-equity-sees-life-and-annuities-as-an-enticing-form-of-permanent-capital

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Excerpt:

Permanent capital—investment funds that do not have to be returned to investors on a timetable, or at all—is, according to some, the “holy grail” of private investing.1 Permanent capital owes its exalted status to the time and effort that managers can save on fundraising, and the flexibility it provides to invest at times, like a crisis, when other forms of capital can become scarce.

….

The trend is not new: private investing in insurance dates back more than 50 years to Berkshire Hathaway’s acquisition of National Indemnity in 1967. As that example shows, many forms of insurance beyond life and annuities can serve as permanent capital, including specialty and property and casualty (P&C). In this article, however, we’ll focus on the reasons why many PE firms have concluded that life insurance and annuities represent a once-in-a-generation opportunity. We’ll also look at the requirements for PE firms on the sidelines that want to enter the market, discuss some overlooked ways that PE owners can create value, and highlight some implications for life insurers as they consider either selling a portion of their book of business or emulating and competing with this potent new industry force.

Author(s): Ramnath Balasubramanian, Alex D’Amico, Rajiv Dattani, and Diego Mattone

Publication Date: 2 Feb 2022

Publication Site: McKinsey