GOP presidential hopeful Mitt Romney has taken a fair amount of criticism from the left and the right over his role at Bain Capital,
the private equity firm he helped found in 1984. Bain, some critics argue, pursued a strategy of investing in struggling firms and then promptly laying off workers in pursuit of a turnaround. Romney's response, by contrast has been that Bain ultimately created more jobs than it helped eliminated via its investment strategies. But left out of the debate, especially by critics on the left, is the enormous role that public sector pension funds, whose investing strategies are often overseen by elected officials, have played in the rise of private equity. As the New York Times noted in 2010, private equity firms owe their explosive growth to public pension funds.
the private equity firm he helped found in 1984. Bain, some critics argue, pursued a strategy of investing in struggling firms and then promptly laying off workers in pursuit of a turnaround. Romney's response, by contrast has been that Bain ultimately created more jobs than it helped eliminated via its investment strategies. But left out of the debate, especially by critics on the left, is the enormous role that public sector pension funds, whose investing strategies are often overseen by elected officials, have played in the rise of private equity. As the New York Times noted in 2010, private equity firms owe their explosive growth to public pension funds. "Buyout funds raised $200 million in 1980 and $200 billion in 2007. According to Prequin, a financial data provider, public pension funds were the biggest contributors over that period and now have $115.9 billion invested in private equity," the Times wrote.Over at Calpensions.com, Ed Mendel details the extensive use that Calpers and Calsters, the state's two huge pension funds, have made of private equity investing.
"The California Public Employees Retirement System, after investments plunged from $260 billion in fall 2007 to $160 billion in March 2009, increased its private equity target from 10 to 14 percent of the portfolio. The fund was $226.5 billion last week.
The California State Teachers Retirement System, which fell from $180 billion in October 2007 to $112 billion in March 2009, increased its private equity target from 9 to 12 percent of the portfolio. Its fund was $146 billion on Nov. 30."
Private equity investing has been good for the funds, and for California taxpayers.Mendel notes that the year over year return at Calpers from private equity investments was nearly 29 percent, and the average over 10 years was a robust 8.9 percent, or far above what the funds have been earning in the public stock markets.
Will the funds be pressured to turn their backs on private equity as the debate heats up, which it is sure to do if Romney garners the GOP nomination? Can our seriously underfund public pension funds afford to forgo those kinds of returns when their other investments are performing so poorly?
This will end in disaster. The public employee pension funds are being raped by "alterntive investments," because they want to use those investments to justify their excessive assumed returns, which were used to justify pension contribution holidays and retroactive pension enhancements.
The private equity model is to leverage to the hilt to buy a company, pretty it up, and sell it back to the greater fools in the public markets. If they actually have to hold and run the companies, their excess debt wrecks their return. That's the situation a lot of these private equity deals are in right now -- underwater, and extending and pretending.
What the public employee pension funds seem not to get is that in the public markets they ARE the greater fools. If they buy, they lose on stocks what they gain on private equity. If they don't, private equity loses.