CalSTRS | Pension360

CalSTRS Loses $125 Million on Florida Industrial Land

CalSTRS revealed Thursday it had lost $125 million on an investment – reportedly written off since 2009 – in a piece of industrial land in Florida that lost much of its value when land values went bust just over a half-decade ago.

CalSTRS had been waiting for the price of the land to recover a bit before selling – and the fund did recover some of its losses.

But the time to sell was now given the fund is restructuring its real estate portfolio.

More details from the Sacramento Bee:

CalSTRS said Thursday it lost around $125 million on the sale of some Florida real estate […]

The California State Teachers’ Retirement System confirmed that one of its investment partnerships recorded a $132 million loss on the recent sale of a swath of industrial land in Florida’s Palm Beach County.

CalSTRS spokesman Ricardo Duran said the teachers’ pension fund owned 95 percent of the investment and took 95 percent of the loss.

The deal was first reported by the Palm Beach Post and South Florida Business Journal.

Duran said CalSTRS wrote off the investment entirely in 2009, so the sale price represents a partial recovery of its losses. The sale price was nearly $3 million higher than CalSTRS valued the land in the third quarter of this year.

CalSTRS decided not to wait any longer for land prices to recover, however. “The likelihood of getting what we paid for it anytime soon is pretty remote,” Duran said.

Besides, CalSTRS wanted to unload the property as it implements a restructuring of its real estate portfolio, moving away from speculative land deals in favor of leased-up, income-producing properties. “This is part of our de-risking,” Duran said.

CalSTRS manages a $189.7 billion portfolio.

Photo by Stephen Curtin

CalPERS, CalSTRS Responds To Push For Coal Divestment

California Senate President Kevin de León said on Monday he would introduce a bill in 2015 that would require CalPERS and CalSTRS to divest from coal-related investments.

CalPERS was the first of the funds to publicly respond to the bill. Summarized by Chief Investment Officer magazine:

CalPERS responded strongly to the proposal, stating that “we firmly believe engagement is the first call of action, and results show that it is the most effective form of communicating concerns with the companies we own”.

The statement also detailed CalPERS’ “proven track record” of engaging and dealing with climate change risks within its portfolio. This included CalPERS’ work as a founder member of the Investor Network on Climate Change, and its efforts to persuade governments and policy makers to support a low-carbon future.

“We are also working aggressively with a coalition of 75 international investors worth over $3 trillion in assets to engage with the 45 largest fossil fuel companies to ensure they are taking appropriate action to manage the physical and capital risks associated with climate change,” CalPERS said.

CalSTRS released its own response as well, according to ai-cio.com:

CalSTRS highlighted its review of “sustainable investing and risk management” as well as its plan to triple the value of its investments in clean energy and technology in the next five years. CIO Chris Ailman said at the time the pension could raise its allocation as high as $9.5 billion—5% of the current value of its portfolio.

CalSTRS said climate change was “a material risk assessed across the entire portfolio that could impact current and future investment value”.

“CalSTRS believes our investment decisions must carefully weigh our duty to perform profitably with consideration of environmental, social and governance impact of those investments,” it added. “CalSTRS is a patient, long-term investor, and the ultimate impact of our investment in coal is something that we will be assessing in the coming year.”

CalPERS’ full statement, released on Facebook, can be seen here.

Photo by Paul Falardeau via Flickr CC License

California Senator Formulating Bill to Force CalSTRS, CalPERS to Divest From Coal

California Senate President Kevin de León said Monday he may introduce a bill in 2015 that would require the state’s pension systems – CalPERS and CalSTRS, two of the largest systems in the world – to divest from coal-related investments.

The bill wouldn’t cover oil or gas investments.

The legislation seems to be in its earliest stages.

The move would be a controversial one not just for the fiduciary complications involved. The Center for Retirement Research has done work on the subject of social investing (and divesting) and found that outcomes may not favor pension funds.

Video: CalSTRS CIO on Corporate Governance and Splitting CEO and Chairman Roles

In this discussion, CalSTRS Chief Investment Officer Chris Ailman talks about why he thinks corporations need to have separate CEO and chairman roles – and how CalSTRS is pushing companies to divide those roles.

Video: CalSTRS CIO On Pros and Cons of Activist Investing

CalSTRS Chief Investment Officer Chris Ailman sat down with Bloomberg TV this week to talk about the pros and cons of activist investing and the difference between “white hat” and “black hat” activist investors.

Also appearing is Columbia Business School Adjunct Professor Fabio Savoldelli.

Video: CalSTRS CIO Talks 2015 Market Expectations, Asset Allocation Changes

CalSTRS chief investment officer Christopher Ailman sat down with Bloomberg TV on Monday morning to talk about the odds of the market returning 8 to 10 percent in 2015, and how CalSTRS might change its asset allocation next year.

Cover photo by Santiago Medem via Flickr CC

Will Pension Funds Have to Foot Bill For PE Firms in Collusion Settlement?

In September, seven investment firms ended a years-long lawsuit by agreeing to a $590 million settlement with corporate shareholders who were accusing the firms of colluding to keep prices down during the “buyout boom”.

But for pension funds, the ramifications of the settlement are just beginning as they wonder how the costs of the settlement will be divided among the investment firms and their limited partners.

From the Wall Street Journal:

The California State Teachers’ Retirement System is in ongoing discussions with private equity firms involved in a collusion case about how the costs of the settlements will be shared with limited partners, said Christopher J. Ailman, the pension system’s chief investment officer.

At the center of these discussions is where the responsibility for making the settlement payments lies–in the funds from which the firms made the investments or the firms themselves–and if both are responsible, how the payments and related legal fees should be split.

“That’s still being discussed,” said Mr. Ailman. “Different firms are taking different tacks.”

[…]

Mr. Ailman called the suit “frustrating” and blamed the case on the practice of frivolous lawsuits being made against corporate acquirers.

“It’s disappointing that there are still lawyers chasing after these funds,” said Mr. Ailman, adding that the collusion suit, “in particular, is frustrating because we think it’s without merit.”

Mr. Ailman said that in general, fund documents stipulate clearly that any legal expenses related to fund investments should be covered by the fund. But that shouldn’t entirely absolve the private equity firm that manages the fund because as the general partner, the firm has a fiduciary duty toward its investors.

“I always say to my GPs that ‘What’s written there is the bottom-line agreement,’” said Mr. Ailman. “‘We [also] shook hands and have an intellectual agreement. You are my agent. You are the fiduciary to us. We invest together.’”

More background on the settlement, from the WSJ:

The lawsuit, filed by certain shareholders of companies that were acquired during last decade’s buyout boom, alleged that the firms-Blackstone Group, Kohlberg Kravis Roberts & Co., TPG Capital, Carlyle Group, Bain Capital, Goldman Sachs Group Inc. and Silver Lake-colluded to keep prices down while bidding for companies during that time frame.

By early September, all seven firms had settled with the plaintiffs, ending a seven-year litigation process and making the firms liable for a total of $590.5 million in settlement payments.

All the firms in the lawsuit denied wrongdoing and said they decided to settle the case to avoid further distraction and litigation expenses.

CalSTRS Commits $290 Million to European Real Estate Funds

CalSTRS has committed $293 million to two funds that invest in European real estate. The moves are part of the pension fund’s planned third quarter real estate commitment of $900 million.

Details on the investments from IPE Real Estate:

Commitments of $200m and €75m were made to TCI Fund Management’s Real Estate Partners Fund I and Meyer Bergman European Retail Partners, respectively.

The investment in TCI Fund I, which invests in first mortgages backed by trophy assets in Western Europe and the US, has been placed into CalSTRS’s core portfolio.

CalSTRS said the assets backing the mortgages were the key appeal, alongside the income-producing potential of the strategy.

Net IRR for CalSTRS’s core assets is between 6% and 8%.

The commitment from CalSTRS represents 25% of TCI’s targeted $800m capital raise.

CalSTRS’s view that there is a strong market opportunity for European value-add retail was behind its decision to back Meyer Bergman.

The pension fund also cited a lack of available new development in Western Europe.

The fund will target Germany, France, the Nordics and the UK.

The two commitments, part of $900m approved for real estate during the third quarter, come alongside a $100m allocation to Pramerica Real Estate Investors’ PRISA II open-ended fund.

The $6.5bn fund has an income-generating core component and a non-core, build-to-core and lease-up component.

CalSTRS, with assets of $187 billion, is the second-largest public pension fund in the United States.

Photo by Stephen Curtin

Kolivakis Weighs In On Restructuring of CalSTRS Investment Staff

CalSTRS recently completed a restructuring of its investment staff, which including appointing its first chief operating investment officer.

The restructuring had a purpose: the fund is planning to move a significant portion of investment management duties in-house.

CalSTRS currently manages 45 percent of its portfolio internally. The fund wants to bring that number up to 60 percent, according to a CalSTRS press release.

Leo Kolivakis, who runs the blog Pension Pulse, weighed in on the changes in a recent post, which is printed, in part, below:

_____________________

By Leo Kolivakis

The shift toward internal management is a smart move and I like the way they restructured their senior staff to implement this shift.

According to Reuters, Debra Smith, the new chief operating investment officer, will oversee the fund’s Investment Operations, Branch Administration, and a new unit comprised of Compliance, Internal Controls, Ethics and Business Continuity. And as stated in the WSJ article above, Smith will report to the investment committee twice a year, giving her a direct line to board members.

Pay attention here folks because this is a great move from a pension governance perspective. I’ve always argued that the head of risk and head of operations at public and private pension funds should report directly to the board of directors, not the CEO or CIO. If there is a disagreement on operational or investment risks being taken, the board can listen to the arguments and decide if the risks are worth taking.

I’ve also long argued that whistleblowers need to be protected and whistleblower policies need to be beefed up at all public pension funds so that employees who witness shady activity can safely report it without worrying about being fired. If some senior manager is accepting bribes from an external fund manager or from a big vendor peddling the latest most expensive software, there should be a way to detect and report this fraud.

Finally, go back to read my comment on why U.S. pension funds are going Canadian. The reason is simple. It makes sense to manage assets internally, saving on fees and having more control over your investments. CalSTRS isn’t the first big state pension fund to do this (Wisconsin is) and it won’t be the last.

Of course, to really go Canadian, U.S. public pensions have to pay their senior investment staff big bucks and they have to separate politics from their entire governance process. When I read articles on how John Buck Co., a real-estate investment firm whose executives contributed substantially to the campaign of Chicago Mayor Rahm Emanuel, has earned more than $1 million in fees for managing city pension money, I shake my head in disbelief. This is Chicago-style politics at its worst. No wonder Illinois is a pension hell hole!

Photo by Stephen Curtin

Moody’s: Deals With CalPERS Will Further “Weaken” Bankrupt California Cities

Three California cities – Stockton, San Bernardino, and Vallejo – have declared bankruptcy in recent years. But all three have struck deals with CalPERS to keep its citizens’ pension benefits intact.

That’s a win for pensioners, but Moody’s says the deals may not be healthy for the cities: they will have to pay large, rising contributions to CalPERS, and risk “weakening” their financial profiles in the process.

From Chief Investment Officer:

Moody’s said [San Bernardino] would face rising bills from CalPERS in the years ahead.

“San Bernardino’s choice to leave its accrued pension liabilities unimpaired means that its contribution requirements to CalPERS will likely increase to the point where they weaken the city’s financial profile, even after the relief provided by the bankruptcy adjustments,” said report authors Gregory Lipitz and Thomas Aaron.

The pair added that they expect similar “weakening” in both Stockton and Vallejo, two other Californian cities that have reached funding agreements with CalPERS following bankruptcy. CalPERS and the California State Teachers’ Retirement System have both been increasing employer contribution rates to deal with funding gaps and improvements in longevity.

“CalPERS’ latest actuarial valuations for each city forecast unrelenting increases to required contributions, despite the very strong investment performance of CalPERS in 2013 and 2014,” Moody’s said.

Actuarial projections indicate that by 2021, the three cities’ contributions could rise to between 30 percent and 40 percent of payroll.

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