Private Equity Firm Threatens To Shut Out Iowa Pension Over FOIA Request


Over at Naked Capitalism, Yves Smith has penned a long post expounding on the practice of private equity firms dissuading public pension funds from complying with FOIA requests related to investment data – often with the threat of shutting out pension funds from future investment opportunities.

The post stems from yesterday’s Wall Street Journal report covering the same topic.

Here’s the Naked Capitalism post in full:


By Yves Smith

A new story on private equity secrecy by Mark Maremont at the Wall Street Journal started out with a bombshell, that of private equity industry kingpin KKR muscling a public pension fund to deny information requests about KKR’s practices:

KKR & Co. warned Iowa’s public pension fund against complying with a public-records request for information about fees it paid the buyout firm, saying that doing so risked it being barred from future private-equity investments.

In an Oct. 28 letter to the Iowa Public Employees’ Retirement System, KKR General Counsel David Sorkin said the data was confidential and exempt from disclosure under Iowa’s open-records law. Releasing it could cause “competitive harm” to KKR, the letter said, and could prompt private-equity fund managers to bar entree to future deals and “jeopardize [the pension fund’s] access to attractive investment opportunities.”

The article also demonstrated, as we’ve pointed out earlier, than many investors are so cowed that they don’t need to be on the receiving end of overt threats:

Once public pension funds start releasing detailed information in response to public-records requests, “that’s the moment we’re done,” said Linda Calnan, interim chief investment officer of the Houston Firefighters’ Relief and Retirement Fund. “These are sensitive documents that managers don’t want out there.”

This risk, that private equity funds might exclude public pension funds that the general partners deemed to be insufficiently zealous in defending their information lockdown, has long been the excuse served up public pension funds for going along with these secrecy demands. As we demonstrated in May, the notion that the information that the funds are keeping hidden rises to the level of being a trade secret or causing competitive harm is ludicrous. We based that conclusion on a review of a dozen limited partnership agreements, the documents that the industry is most desperate to keep under lock and key.

But the only known instance of that sort of redlining actually taking place, as the Journal notes, took place in 2003 after CalPERS said it would start publishing limited data on financial returns as a result of a settlement of a Public Records Act (California-speak for FOIA) lawsuit. As we wrote in April:

Two venture capital firms, Sequoia and Kleiner Perkins, had a hissy fit and refused to let funds that would disclose their return data invest in them. Now this is of course terribly dramatic and has given some grist to the public pension funds’ paranoia that they’d be shut out of investments if they get too uppity. But the fact is that public pension funds overall aren’t big venture capital investors. And people in the industry argue that there was a obvious self-serving motive for Sequoia to hide its returns. Sequoia has launched a number of foreign funds, and many are believed not to have performed well. Why would you invest in Sequoia’s, say, third India fund if you could see that funds one and two were dogs?

So why has industry leader KKR stooped to issue an explicit, thuggish threat? Why are they so threatened as to cudgel an Iowa pension fund into cooperating with KKR and heavily redacting the response? Just as with the Sequoia and Kleiner Perkins case, it’s naked, and not at all defensible self interest.

Law firm Ropes & Gray, which counts Bain Capital among its clients, issued what amounted to an alarm to its private equity and “alternative investment” clients over an increase in inquiries to public pension funds about the very subject that the SEC had warned about in May, about fee and expense abuses, as well as other serious compliance failures. It’s a not-well-kept-secret that many investors were correctly upset about the SEC’s warnings, and some lodged written inquires with general partners as to what specifically was going on. We’ve embedded an unredacted example of one such letter at end of this post. It was the same one that CalPERS board member JJ Jelincic used to question investment consultants last month because the letter ‘fessed up to an abusive practice called evergreen fees.

Journalists like Maremont and interested members of the public have written public pension funds to obtain the general partners’ responses to these questionnaires. And this is a matter of public interest, since shortfalls in private equity funds, even minor grifting, is ultimately stealing from beneficiaries, and if the pension fund is underfunded, from taxpayers. Yet notice how Ropes & Gray depicts questions about what are ultimately taxpayer exposures as pesky and unwarranted intrusions:

We have recently observed a surge in freedom-of-information (“FOIA”) requests made by media outlets to state pension funds and other state-government-affiliated investment entities. Although the requests have so far concentrated on information related to private equity sponsors, they have also sought information about investments with other alternative investment fund sponsors. The requests tend to focus on information about advisers’ treatment of fees and expenses, issues raised as areas of SEC interest in a speech by an SEC official earlier this year. The requests may also ask for information concerning recent SEC examinations of fund managers. Many state-level FOIA laws exempt confidential business information, including private equity or other alternative investment fund information in particular, from disclosure. Nonetheless, record-keepers at state investment entities may reflexively assume that all information requested should be disclosed. But a prompt response, supported by the applicable state law, can help ensure that confidential information that is exempt from FOIA disclosure is in fact not released.

The sleight of hand here, which we’ve discussed longer-form, that merely asserting that something is confidential does not exempt it from disclosure. In fact, if you look at the examples from selected states that Ropes & Gray cites in its missive, states have tended to shield certain specific types of private equity information from disclosure, including limited partnership agreements and detailed fund performance information, but generally restrict other disclosures not on the basis of mere confidentiality but on trade secrecy or similar competitive harm, meaning the private equity firm’s competitors might learn something about the fund’s secret sauce if they obtained that information.

Please look at the first letter at the end of this post and tell me what if anything in it is so valuable that competitors might seek to copy it. Contrast that with a second letter from a Florida pension fund, from KKR that the Journal obtained and see how much is blacked out.

The fact is that the various FOIAs focused on getting at SEC abuses aren’t about protecting valuable industry intelligence, to the extent there really is any in any of their documents; it’s simply to hide their dirty laundry. The Wall Street Journal story reports how in Washington, Florida, and North Carolina, public pension fund officials have been acceding to private equity fund “concerns” and using strategies ranging from foot-dragging to woefully incomplete disclosure to outright denial to stymie inquiries.

The interesting thing about KKR’s exposure is that its defensiveness is likely due to how much scrutiny it is getting from the SEC. Maremont earlier exposed how KKR’s captive consulting firm KKR Capstone appeared to be charging undisclosed, hence impermissible fees to KKR funds. KKR has attempted to defend the practice by arguing that KKR Capstone isn’t an affiliate. We debunked that argument here.

Even though we have criticized the SEC for its apparent inaction on the private equity front, in terms of following through with Wells notices after describing widespread private equity industry malfeasance, we have been told that the agency is in the process of building some major cases against private equity firms. Given how many times KKR’s name has come up in Wall Street Journal, New York Times, and Financial Times stories on dubious private equity industry practices, one has to imagine that KKR would be a likely target for any action that the SEC would consider to be “major”.

This is an area where readers can make a difference. The one thing public pension funds, even one like CalPERS, are afraid of is their state legislature. Call or e-mail your state representatives. If you have the time and energy, also write to the editor of your local paper and the producers of your local television station. Tell them you’ve read in the New York Times and the Wall Street Journal (and if you are in California, the Sacramento Bee) about public pension funds refusing to provide information to members of the public about fees as well as widespread abuses that the SEC discussed at length in a speech this year. Tell them that the SEC has made it clear that private equity can’t be treated on a “trust me” basis any more. The time has come for more pressure on public pension funds to weight the public interest more strongly in dealing with these inquiries, and if needed, new legislation to force more accountability from private equity funds and their government investors.

New Mexico Pension Grants Staff Authority to Pull Trigger on Some Alternative Transactions

numbers and graphs

The pension fund that manages assets for New Mexico’s teachers and professors disclosed this week it has given investment staff a bit of new authority: the ability to execute transactions on alternative secondary markets.

Reported by Pensions & Investments:

New Mexico Educational Retirement Board, Santa Fe, delegated general, ongoing authority to the staff to execute transactions on the alternative investment secondary markets “when it is deemed appropriate by staff and the asset class consultant,” said Bob Jacksha, chief investment officer of the $11.2 billion pension fund, in an e-mail.

This is blanket authority across all non-publicly traded asset classes, Mr. Jacksha said.

“Secondary transactions are difficult to execute in the traditional committee approval structure/timetable,” Mr. Jacksha wrote. “This authority is in recognition of that fact. It is expected to be used sparingly.”

The authority is not attached to any one specific transaction, Mr. Jacksha said.

The pension fund had $271 million in private real estate and $849 million in private equity as of June 30.

The New Mexico Educational Retirement Board manages $11.2 billion in assets for 132,000 members.

Dallas Police Pension To Exit Luxury Real Estate After Big Losses


After experiencing big losses, the Dallas Police & Fire Pension System is exiting its position in luxury real estate investments, including a piece of Arizona land meant for a golf course that never materialized.

The fund’s luxury real estate investments have dragged down its portfolio’s overall returns since 2011.

From Bloomberg:

The Dallas police and firefighters’ retirement plan has soured on luxury real estate.

The $3.4 billion Dallas Police & Fire Pension System is selling houses in Hawaii, a Napa Valley vineyard and a patch of Arizona desert after losing about $200 million on the deals, according to city council members who serve as board members for the fund. The system plans to put the cash into traditional assets such as stocks and bonds.

The sales mark a shift from an approach that by 2011 left more than 60 percent of the system’s money in real estate, private equity and other alternative investments, only to see returns suffer. The fund’s 4.4 percent gain in 2013 compared with the 16.1 percent average advance for U.S. public pensions as stocks rallied, according to research firm Wilshire.

“It’s a terrible indictment of our strategy,” said Councilman Philip Kingston, who sits on the pension’s board. “Losses have been caused by our exposure to luxury real estate.”

More details on two of the investments: a piece of land in Arizona that was to be developed into a golf course, and a downtown Dallas apartment tower. From Bloomberg:

Land it bought for a golf-course development in Pima County, Arizona, couldn’t be developed because the fund hadn’t secured water rights, Kleinman said. The land later sold for $7.5 million, a fraction of the $34 million invested, the Dallas Morning News reported in September.

Tettamant, who was at the fund for more than 20 years, resigned in June after board members questioned how the real estate investments affected returns. He didn’t respond to a phone call to his home seeking comment on his role.

The city, which has four council members on the fund’s 12-member board, has been exercising more control and has asked the fund to list properties based on market value, Kleinman said. That led to audits that reduced values, depressing returns for 2013.

The fund may face other liabilities from an investment in a $200 million apartment tower in downtown Dallas. The nearby Nasher Sculpture Center says light reflected from the building is damaging art work and plants in its garden. The dispute is unresolved and the pension may be stuck with the expense of reducing the glare.

“We were throwing good money after bad,” Kleinman said. “The board is going to take a more critical look at its investments going forward. We have no business investing directly in real estate.”

Dallas Police & Fire Pension System manages $3.4 billion in assets. Its investments returned 4.4 percent in 2013

Surveys: Institutional Investors Disillusioned With Hedge Funds, But Warming To Real Estate And Infrastructure

sliced one hundred dollar bill

Two separate surveys released in recent days suggest institutional investors might be growing weary of hedge funds and the associated fees and lack of transparency.

But the survey results also show that the same investors are becoming more enthused with infrastructure and real estate investments.

The dissatisfaction with hedge funds — and their fee structures — is much more pronounced in the U.S. than anywhere else. From the Boston Globe:

Hedge funds and private equity funds took a hit among US institutions and pension managers in a survey by Fidelity Investments released Monday.

The survey found that only 19 percent of American managers of pensions and other large funds believe the benefits of hedge funds and private equity funds are worth the fees they charge. That contrasted with Europe and Asia, where the vast majority — 72 percent and 91 percent, respectively — said the fees were fair.

The US responses appear to reflect growing dissatisfaction with the fees charged by hedge funds, in particular. Both hedge funds and private equity funds typically charge 2 percent upfront and keep 20 percent of the profits they generate for clients.

Derek Young, vice chairman of Pyramis Global Advisors , the institutional arm of Fidelity that conducted the survey, chalked up the US skepticism to a longer period of having worked with alternative investments.

“There’s an experience level in the US that’s significantly beyond the other regions of the world,’’ Young said.

A separate survey came to a similar conclusion. But it also indicated that, for institutional investors looking to invest in hedge funds, priorities are changing: returns are taking a back seat to lower fees, more transparency and the promise of diversification. From Chief Investment Officer:

Institutional investors are growing unsatisfied with hedge fund performance and are increasingly skeptical of the quality of future returns, according to a survey by UBS Fund Services and PricewaterhouseCoopers (PwC).

The survey of investors overseeing a collective $1.9 trillion found that only 39% were satisfied with the performance of their hedge fund managers, and only a quarter of respondents said they expected a “satisfying level of performance” in the next 12-24 months.


The report claimed this showed a change in expectations of what hedge funds are chosen to achieve. Investors no longer expect double-digit returns, but instead are content to settle for lower fees, better transparency, and low correlations with other asset classes.

Mark Porter, head of UBS Fund Services, said: “With institutional money now accounting for 80% of the hedge fund industry, they will continue seeking greater transparency over how performance is achieved and how risks are managed, leading to increased due diligence requirements for alternative managers.”

Meanwhile, the USB survey also indicated investors are looking to increase their allocations to infrastructure and real estate investments. From Chief Investment Officer:

“Despite the challenges of devising investment structures that can effectively navigate the dynamic arena of alternative markets, asset managers should remain committed to infrastructure and real assets which could drive up total assets under management in these two asset classes,” the report said.

“This new generation of alternative investments is expected to address the increasing asset and liability constraints of institutional investors and satisfy their preeminent objective of a de-correlation to more traditional asset classes.”

The report noted that despite waning enthusiasm for hedge funds, allocations aren’t likely to change for the next few years.

But alternative investments on the whole, according to the report, are expected to double by 2020.

Kentucky Bill Aims To Increase Transparency, Accountability In Retirement System

flag of Kentucky

Kentucky State Rep. Jim Wayne has introduced legislation that would infuse a ray of transparency into the state’s retirement systems, including KRS, a system oft criticized for its opaque practices.

From the Independent:

The legislation, Bill Request 91, would require state-administered retirement systems to operate under the state procurement laws, which includes making contracts public. It would also prohibit the use of placement agents, intermediaries who have been involved in pay to play scandals in other states.

The legislation also seeks to tighten requirements for KRS board members appointed by the governor to ensure they have appropriate investment expertise. The current low-qualified “investment experts” on the board refused to comment on any investment issues for the Kentucky Center for Investigative Reporting story, Wayne said. He added the two investment experts on the board need to be knowledgeable, independent and willing to be accountable to the public.


“The current model smacks of the good ol’ boy system,” said Wayne, D-Louisville. “The system is closed. A small group decides behind closed doors who gets to manage billions of dollars in public money and what they’ll get paid for it, no questions allowed. That’s just way to chummy for my tastes.”

The urgency for such legislation was illustrated after two journalism organizations investigating the pension plans during the summer were denied information on fees and even the names of individual managers, Wayne said.

The Lexington Herald-Leader reported June 14 that KRS spent at least $31 million on managers of hedge funds, private equity, real estate and other “alternative investments” that hold just one-fourth of the system’s $15 million in assets and produced its lowest returns.

A July 24 report by the Kentucky Center for Investigative Reporting in Louisville found KRS potentially spent $156 million in mostly undisclosed fees to these “alternative investments.”

Wayne added one more comment:

“The health and well-being of public employee retirement systems should not be shrouded in mystery,” said Wayne. “No one should be required to invest their hard-earned money in a system that is not fully transparent. Not only should public employees know if the systems are financially stable, the taxpayers should also know.”

The Kentucky Retirement Systems holds $16 billion in assets and is about 45 percent funded, although certain parts of the system are unhealthier.

KRS allocates about 35 percent of its assets toward alternative investments, including real estate; the nationwide average is 25 percent, according to data from Cliffwater LLC.

Deutsche Bank: CalPERS’ Hedge Fund Exit “Has No Bearing” On Allocations Of Institutional Investors

The CalPERS Building in West Sacramento, California.
The CalPERS Building in West Sacramento, California.

Deutsche Bank says that after a series of meetings this month with institutional investors, they’ve concluded that CalPERS’ hedge fund exit “has no bearing on most investors commitment to the industry.”

From ValueWalk:

Deutsche Bank prime brokerage notes that hedge funds have been engaged in “extreme protection buying in equities” and said that the recent exit from hedge funds by CalPERS “has no bearing on most investors commitment to the industry.”

After speaking with the institutional investor community regarding their commitment to maintain their hedge fund allocations, Deutsche Bank’s Capital Introductions group reports this positive message that it says was bolstered by recent meetings with Canadian pensions and global insurance companies throughout the month, while a trip to Munich indicated an increase in hedge fund exposure from institutions.


Separate hedge fund observers, meanwhile will be watching numeric asset flow patterns in December and the first quarter of 2015 to determine on an objective basis if there has been a statistical move away from hedge funds.

Even if institutional investors on the whole aren’t moving away from hedge funds, the exit by CalPERS – and the public debate swirling around the investment expenses associated with hedge funds – has forced some hedge funds to reconsider their fee structures. From the Wall Street Journal:

Two titans of the hedge-fund and private-equity world say they are growing more open to reducing fees in the face of rising scrutiny of the compensation paid to managers of so-called alternative investments.


Mr. [John] Paulson [founder of hedge fund firm Paulson & Co.] said he feels “pressure” to act in the wake of “enormous numbers in compensation” for hedge fund managers. Mr. Paulson, 58, earned a reported $2.3 billion last year, counting both fees and the appreciation of his own personal investment in his funds.

“Institutions are becoming a little more demanding…they are putting pressure on the management fee and the incentive fee,” he said Monday during a panel discussion at New York University’s Stern School of Business.

Joseph Landy, co-CEO of $39 billion buyout shop Warburg Pincus, echoed Mr. Paulson’s experience.

“There are a lot of private-equity managers out there who can make a lot of money before they return a dime to investors,” Mr. Landy said. “Most of the pressure [to reduce fees] has been on the actual annual management fee.”

Neither he nor Mr. Paulson, however, were too concerned about any widespread threats to their businesses.

“We came out relatively unscathed from the crisis. We’re doing pretty much the same things we did as before [with] very little restrictions on how we invest the money,” Mr. Paulson said.

Paulson said he think more hedge funds will start using “hurdles”, a fee structure which prevents managers from collecting performance fees until they’ve met a certain benchmark return.


Photo by Stephen Curtin

Interview: Hedge Fund Mogul Talks CalPERS’ Pullout, Manager Selection and Justifying Fees

question bubbles

Forbes released an interview Thursday morning with Anthony Scaramucci, founder and co-managing partner of alternatives investment firm SkyBridge Capital.

The interview touched on CalPERS’ hedge fund exit, how the pension fund picked the wrong managers and how to pick the right ones. Later, Scaramucci touched on justifying the industry’s fee structure.

On CalPERS’ pullout:

Steve Forbes: Thank you, Anthony, for joining us. To begin, in terms of hedge funds, as you know the overall performance of hedge funds has lagged the market in recent years. CalPERS, the largest hedge fund in the country, made headlines by saying, “We’re getting out of this.” What is that a sign of? Either the hedge fund industry is going away and is only sustained because there’s nothing else around that’s suppressing interest rates or is this a sign of the bottom? When a big one gets out does that mean this is the time to get in?

Anthony Scaramucci:  Well, so, the question’s is it going to get easier or harder from here?  That was a good start, Steve.  But the short answer is that there’s a lot of reasons why the industry’s underperformed. The main one has to do with something you often talk about, which is Federal Reserve monetary policy.

So, the policy since March of 2009 has been to hammer down the rates, artificially stimulate the market. This makes it impossible for about 40% of the hedge fund managers to perform. If you look at the overall hedge fund manager index, 40% of it is in long-short managers.

And so if you’re long something, you’re doing great in this market. But I’ve got to tell you something, Steve. If you’re short something, even if you’re right on the security analytics, you’re going to be wrong on the momentum of the market. And so what’s happened to the long-short managers is the longs are going up, the shorts are going up, and they have this little tight spread. They’re making 3%, 4%, 5% when the market’s rip roaring and the media is writing all these nasty articles about them.

But there are places to make money. There’s structured credit, activism. There’s a whole host of distressed guys that have done well over the last six years. But I think the media has been justified in pointing out that, in general, the hedge funds have not done well.

The CalPERS thing is a little different. They only had 1.5% of their assets there. Joe Dear, who was a legendary guy at CalPERS, when he passed I think it became one of those things where they weren’t going to get bigger for political reasons, and so they decided to get way smaller.  But I don’t think it’s a death knell of the industry yet. In fact, I’ll make a prediction that we’ll look back two or three years from now and say that they caught the bottom of the hedge fund performance market.

On manager selection:

Forbes: You said that they [CalPERS] picked the wrong hedge fund managers.

Scaramucci: Yes.
Forbes: How do you pick the right ones? Because it’s fine to say, “Well, if you look at the top 10%, you would have done nifty.”

Scaramucci: Yes.

Forbes: But, like, the top 10% of stocks, how do you do it on a consistent basis?

Scaramucci: Well, okay. So, not to use a baseball analogy, but just think of it this way.

Forbes: You can, I’m a fan.

Scaramucci: Okay. So, well then you’ll probably know this from the Bill James Abstracts.  Sixty percent of the everyday players are batting .260 or below, yet every midsummer classic we see 40 guys on the field that are Hall of Famers or the top of what they do. And I think that’s indicative of most industries, frankly, whether it’s the media, the hedge fund industry or, you know, political landscape and so forth. And so there are certain metrics that you can use to identify who’s going to do well. But the number one metric is the macro environment.

If you tell us what the economic dashboard looks like over the next 12 to 18 months, we have pretty high capabilities on the prediction side of what sectors are going to do well. As an example, 2009, if you and I were having this conversation, I would have told you that the residential mortgage-backed security market was going to do very, very well. Those assets were distressed. They were technically oversold by the large institutions. The Federal Reserve monetary policy at that time with Helicopter Ben bringing things down so aggressively, that was going to be an easy place to make money.

And so if you looked at SkyBridge at that period of time, we had about 45% of our assets there. So, the first factor is the macroeconomic factor. The second factor then is, once you figured out what sector you’re going to be in, who are the best guys in that sector and why are they the best? And frankly, a lot of them will be different depending on different markets.  Some guys are longer than others. They’ll always be longer. Lee Cooperman is an example of that. If you’re a bull on the market, Lee’s a good bet. It’s that sort of thing.

On the fee structure of hedge funds:

Forbes: You’re a fund of funds, so to speak.

Scaramucci: Yes. Yes.

Forbes: And you know the rap, hedge funds 2%, 20%.

Scaramucci: Sure.

Forbes: Now your fees 1.5%, whatever it is, on top of that.

Scaramucci: Yes. Yes.
Forbes: How do you justify your existence?

Scaramucci: Well, listen. We’re up there with child molesters with most people, so I’ve got a hard time in justifying my existence at times. But I tell people the same thing that I think you would tell them if you were in my seat. Focus on net performance.

If you’re worried about fees, well then you certainly shouldn’t be in the hedge fund industry.  But I think what we’ve proven, if you look at our long-term track record, we can help clients get to their actuarial goals by taking less risk, or less beta, if you will.

And so our performance is high single-digit, low double-digit over the last ten years with relatively low volatility. And so I think we’ve been able to justify that. But we did shift our model.  I often talk about hedge fund fund of funds 3.0 in the sense that we’re viewing ourselves more like a multi-strat now. We look at the macro environment rather than trying to hug the index, like some of our peers.

The typical fund of funds got a bad rap because they weren’t doing the due diligence. And then they give you 50 managers. They’d give you a 2% in each of those managers. And you’d be hugging the index on your way to mediocrity. What we’ve tried to do, is we’ve tried to concentrate our portfolio on things that we think are working. We have a dynamic approach, where we will move out of securities or move out of hedge funds quickly if we think the market environment has changed. And we believe in concentration.

So, the top ten managers for us, Steve, are about 65% of the assets. And I think that’s differentiated us from our peer group. One last point, if you don’t mind me making it is that, if I’m giving a billion dollars out to somebody, if SkyBridge is giving out a billion dollars, we’re asking for fee concessions. And so we pass those on to our investors. So, even though we have all these loaded fees, so to speak, we’re giving back 75, 80 basis points a year in fee concessions, which I think is meaningful.

The entire interview can be read here.

Denmark Ramps Up Oversight Of Alternative Investments in Pension Systems

Danish flag

The entity that regulates Denmark’s financial system has announced plans to tighten oversight of alternative investments made by pension funds.

The move comes as regulators in the Financial Supervisory Authority have reported an uptick in risk, illiquidity and opacity in pension investments. From Bloomberg:

The Financial Supervisory Authority in Copenhagen will require pension funds to submit quarterly reports on their alternative investments to track their use of hedge funds, exposure to private equity and infrastructure projects. The decision follows funds’ failures to account adequately for risks in their investment strategies, according to an FSA report.

The regulatory clampdown comes as Denmark deals with risks it says are inherent to a system due to be introduced across the European Union in 2016. The new rules will allow pension funds to invest according to a so-called prudent person model, rather than setting outright limits. In Denmark, the approach has proven problematic for the only EU country to have adopted the model, said Jan Parner, the FSA’s deputy director general for pensions.

“The funds are setting up for their release from the quantitative requirements, but the problem is, it’s not clear what a prudent investment is,” Parner said in an interview. “The challenge for European supervisors is to explain to the industry what prudent investments are before the opposite ends up on the balance sheets.”

Denmark, which has almost two years of experience with the approach after its early adoption in 2012, says a lack of clear guidelines invites misinterpretation as firms try to inflate returns.


Danish funds and insurers have overestimated the value of alternative investments they made while failing to adequately account for the risks, the FSA said in a February report.

Pension funds held 152 billion kroner ($26 billion) at the end of 2012, or about 7 percent of their balance sheets, in equity stakes and other assets sold on markets the FSA characterized as illiquid, opaque and thin. The agency said they need to account better for those risks and ordered reports from the third quarter. PFA, Denmark’s biggest commercial pension fund, said today it invested in a shopping mall in western Denmark as part of a strategy to increase its presence in retail properties.

Denmark’s pension systems hold $500 billion in assets, collectively.


Photo: “Dannebrog”. Licensed under Creative Commons Attribution-Share Alike 2.5 via Wikimedia Commons

CalPERS Weighs Foray Into Riskier Loan Securities

 The CalPers Building in West Sacramento California.
The CalPERS building in West Sacramento, California.

CalPERS is considering investing in collateralized loan obligations (CLOs), or securities backed by a pool of (sometimes low-grade) corporate loans.

From the Wall Street Journal:

Fixed-income executives for the nation’s largest public pension fund told their investment board committee Monday they want to buy riskier versions of “collateralized loan obligations,” which are securities backed by corporate loans. The plan already invests in triple-A rated slices of these securities.

“We think we have expertise in this area,” said fixed-income head Curtis Ishii. He added: “You get more spread if you take more risk.”

Mr. Ishii did not disclose how much the system, which is known by its abbreviation Calpers, would like to invest in the riskier loan-based securities. The move still needs to be approved by an investment strategy group comprised of the fund’s top investment officers.

Any shift it makes will likely influence others because of its size and history as an early adopter of alternatives to traditional stocks and bonds.

CalPERS announced last week that it is increasing its real estate holdings by 27 percent.


Photo by Stephen Curtin

Study: Has a 400 Percent Increase in Alternatives Paid Off For Pensions?

CEM ChartA newly-released study by CEM Benchmarking analyzes investment expenses and return data from 300 U.S. defined-benefit plans and attempts to answer the question: did the funds’ reallocation to alternatives pay off?

The simple answer: the study found that some alternative classes performed better than others, but underscored the point that “costs matter and allocations matter” over the long run.

In the chart at the top of this post, you can see the annualized return rates and fees (measured in basis points) of select asset classes from 1998-2011.

Some other highlights from the study:

Listed equity REITs were the top-performing asset class overall in terms of net total returns over this period. Private equity had a higher gross return on average than listed REITs (13.31 percent vs 11.82 percent) but charged fees nearly five times higher on average than REITs (238.3 basis points or 2.38 percent of gross returns for private equity versus 51.6 basis points or 0.52 percent for REITs). As a result, listed equity REITs realized a net return of 11.31 percent vs. 11.10 percent for private equity. Net returns for other real assets, including commodities and infrastructure, were 9.85 percent on average. Net returns for private real estate were 7.61 percent, and hedge funds returned 4.77 percent. On a net basis, REITs also outperformed large cap stocks (6.06 percent) on average and U.S. long duration bonds (8.97 percent).

Many plans could have improved performance by choosing different portfolio allocations. CEM used the information on realized net returns to estimate the marginal benefit that would have resulted from a one percentage point increase in allocation to the various asset classes. Increasing the allocations to long-duration fixed income, listed equity REITs and other real assets would have had the largest positive impacts on plan performance. For example, for a typical plan with $15 billion in assets under management, each one percentage point increase in allocations to listed equity REITs would have boosted total net returns by $180 million over the time period studied.

Allocations changed considerably on average from 1998 through 2011. Of the DB plans analyzed by CEM, public pension plans reduced allocations to stocks by 8.5 percentage points and to bonds by 6.6 percentage points while increasing the allocation to alternative assets, including real estate, by 15.1 percentage points. Corporate plans reduced stock allocations by 19.1 percentage points while increasing allocations to fixed income by 10.5 percentage points (consistent with a shift to liability driven investment strategies), and to alternative assets by 8.6 percentage points. For the DB market as a whole, allocations to stocks decreased 15.1 percentage points; fixed income allocations increased by 4.3 percentage points; and allocations to alternatives increased by 10.8 percentage points. In dollar terms, total investment in alternatives for the 300 funds in the study increased from approximately $125 billion to nearly $600 billion over the study period.

The study’s author commented on his findings in a press release:

“Concern about the adequacy of pension funding has focused attention on investment performance and fees,” said Alexander D. Beath, PhD, author of the CEM study. “The data underscore that when it comes to long-term net returns, costs matter and allocations matter.”


“Many pension plans could have improved performance by choosing different allocation strategies and optimizing their management fees,” Beath continued. “Listed equity REITs delivered higher net total returns than any other alternative asset class for the fourteen-year period we analyzed, driven by high and stable dividend payouts, long-term capital appreciation and a significantly lower fee structure compared to private equity and private real estate funds.”

Read the study here.

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