New Study Undermines Rationale for Investing in Private Equity and CalPERS Strategy in Particular, as Oregon CIO Demonstrates that Public Pension Funds Are Dumb Money | naked capitalism "A new paper by Antoinette Schoar, the chair of the finance department at MIT’s Sloan School and one of the scholars whose studies helped provide the intellectual underpinnings justifying the inclusion of private equity in institutional portfolios, has released a new study that knocks the legs out from under some of her widely-cited earlier work on the persistence of the out-performance of top private equity funds. It also shows that private equity funds have not delivered the performance needed to justify investing in them. From Top 1000 Funds: Persistence of returns in private equity is diminishing. Further, the returns themselves are not what they used to be. And in even further bad news, new research from a leading Massachusetts Institute of Technology academic shows that co-investment vehicles may not be a panacea for these problems… More below. New research by Antoinette Schoar, chair of the finance department and the Michael M Koerner Professor of Entrepreneurship at MIT Sloan School of Management, shows that persistence of returns from private-equity funds in the last decade has gone down, undoing the seminal research she co-authored with Steve Kaplan, from the University of Chicago, that showed “returns persist strongly across funds raised by individual private equity partnerships”. "
So, why are states like California, Oregon, and Idaho investing in these problematic funds? "Oregon CIO Says He Still Likes Private Equity for Its Phony Valuations If public pension funds want to know why they are seen as dumb money, they need look no further than remarks like those of John Skjervem, Chief Investment Officer for Oregon. Keep in mind that John Skjervem is considered to be one of the better public pension fund CIOs. He spoke at the same conference where Schoar discussed her new paper. On the one hand, Skjervem is to be given credit for reducing his allocation to private equity in light of its falling performance and persistence. From a second Top 1000 Funds story: For Oregon’s Skjervem the structural changes have put the asset class under more scrutiny, and he is getting questioned by his board about the continued validity of private equity. Where it was formerly the star performer in the portfolio, more recently it hasn’t met its benchmark, which is the Russell 3000 plus 300 basis points, he says. “We haven’t met our benchmark in at least five years, so we are starting to get questions about performance,” he says. “Is this a realistic benchmark? I would argue no, so then you get into the discussion about what the benchmark should be. “I could argue Russell 3000 plus 10 basis points is worthwhile because 10 basis points on a $16 billion portfolio is real money. But plenty of people want a more significant figure over public markets to justify the illiquidity you are taking on. “For a public plan, I could make a philosophical argument that even if we do nothing but match public market returns, there’s a place for private equity because of the appraisal-based accounting, which artificially smooths our total fund volatility, and there’s a genuine benefit to that.” So see what is going on. First, even though none of the risks of private equity have changed, Skjervem is unwilling to admit that a protracted period of central banks having negative real policy rates has resulted in investors not being paid enough for taking on risk, particularly long-term risks. But he’d rather fudge his metrics, which will lead to poor decisions, rather than keep that basic problem front and center." Oh, great, they love it for the fraud? Fraud and collapse are the current states of the Blue model, and this has infected the Red model states pension funds as well. There is little hope that these investments will ever return anything sufficient to cover the promises made to the pensioners. In the end, this is on the politicians, the union bosses, and the employees themselves. None of these groups have shown any interest in behaving rationally, or responsibly regarding pension funding. I have implored anyone receiving state pension funds, or working in a job relying in the future on state pension funds to take an active role in addressing these issues and demanding full funding of their pension funds. To no avail. How bad is the fraud? "In that same 2015 CalPERS private equity workshop, Idaho CIO Bob Maynard stated up front that the only reason he invested in private equity was for its dishonest reporting: Bob Maynard, Chief Investment Officer, Public Employees Retirement System of Idaho: We’re I think more skeptical of private equity than many and actually I’ve been quite surprised at the experience we’ve had, which has been dead solid on the average. Our time-weighted returns are almost exactly yours [turning to CalPERS’ head of private equity Réal Desrochers], that 1.34 above what you could put in the public markets is exactly our experience, so we’ve actually gotten average institutional experience, so it’s worked out better than we were expecting. We knew we were entering an area where we would not have much influence over what we could do. Ah, in fact, ah, we recognized however that we were going to get some pressure to look at local investments in private side, we did know that our actuaries and accountants would accept the smoothing that the accounting would do. It may be phony happiness, but we just want to think we are happy and they actually do have consequences for ah, ah, actual contribution rates we are going to be able to put in place. So we’re looking for it even if it just gave public market returns, we’d be in favor of it because it has some smoothing effects on both reported and actual risks, as seen that way. Once you get into the area, this is kind of a like a rental car return type investing. Once your front wheels are over the spikes, you can’t back up. You’ve got to keep kind of going forward. If we’re going to have a little bit, we’ve got to at least have enough to have a difference in the portfolio, which means get to at least 5 to 10%. And by the time we got to the 2000s, we had gotten to that point, so it did make an appropriate difference. So we’re there, it’s demonstrated benefits in the portfolio, we’re happy if it gives public market returns, anything extra, because of its effect having some smoothing of the risk as seen by the accountants and actuaries and, um, just don’t, you’ve got to keep going once you are there. We were astonished when the SEC revealed in 2014 that over half the private equity firms they’d examined so far had stolen from investors or engaged in other serious abuses. Given what Maynard and Skjervem have said about clearly bogus private equity reporting which would have most investors running for the hills, we should not have been surprised. Private equity investors see its chicanery as a feature, not a bug." Genius. The entire reason Idaho invests in these fraud motivated funds is for the fraud!? This would be difficult to believe from rational players, but then pension funds/managers have never suffered from, "rational."
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