Sunday, January 29, 2012

Public Sector Pension Plan Investments ... Guess Where the Money's Going?

One part of government says private equity investing is somehow bad, but other parts of government embrace it by entrusting more public sector employees' pension funds to private equity managers.

In truth, private equity is just another form of free market capitalism, but it's become a bad thing to do these days in political circles. Think Mitt Romney and Bain Capital.

Public sector union officials like to say in public that private equity is bad. In private these same people proceed to invest their members' retirement funds in these funds run by the "bad guys." What gives?

Just presidential politics. It sucks.

So when reflecting on whether you believe private equity to be bad or good, let's just chalk up the union leadership's differing public chatter and private investment investing to the difference between talk, which is cheap, and action, which is much more revealing.

As Ralph Waldo Emerson said when contrasting talk to action, "What you do speaks so loudly that I cannot hear what you say."

In any event, public sector pension plans are investing a rapidly growing percentage of their members' pension fund assets with private equity funds. Yes, THOSE private equity funds.

Public Pensions Increase Private-Equity Investments tells what's happening with respect to the growing closer relationship between public employee pension funds and private equity managers.

Here's a brief excerpt from the most informative article:

"Large public pension plans are pouring more money into private-equity funds, deepening ties between government workers and an industry currently under the harsh glare of U.S. presidential politics.

Big public-employee pensions had about $220 billion invested in private equity in September, or 11% of their assets, according to Wilshire Trust Universe Comparison Service, which tracks the holdings of pensions, foundations and endowments.


That is up about $50 billion from a year earlier, when such investments accounted for 8.6% of large pension funds' assets. A decade ago, pensions with at least $1 billion under management had just 3% of their money with private equity.

Private-equity funds buy companies, restructure them and try to profit by reselling them at a higher price. That approach, particularly with respect to the fate of workers at companies they buy, has become an issue in the Republican campaign because Mitt Romney formerly led private-equity firm Bain Capital."

The article provides insight into the unions' love-hate affair with private equity and their fiduciary reasons for investing in private equity funds:

"Pension-fund officials say they increasingly are turning to private equity in an effort to hit annual return targets of 8%. Over both the past five years and the past 10 years, private-equity returns were more than double those of the S&P 500 stock index and the Dow Jones Industrial Average . . . .

As of September 2011, median private-equity returns for large public pension funds over the past five years was 6.6%, according to Wilshire Associates. Median stock-market returns for those funds were a negative 0.9% over that same five-year period. . . .

Today, pension-fund managers "would say you may be breaching your fiduciary duty if you avoid this asset class," said Bill Kelly, a lawyer at Nixon Peabody who has worked with pensions and private-equity firms for 30 years.

Wilshire said private-equity investments surged last year as a percentage of pension-fund holdings partly because pension funds' existing investments in private equity increased in value while other holdings, such as stocks, were mostly flat."

As I said earlier, let's all keep a much needed sense of humor as we listen to the politicians this election season. Some of this stuff you just can't make up.

But it is entertaining in a sad kind of way.

Thanks. Bob.

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