"Pensions' Private Equity Cash Reduced 59%"

Naked Capitalism through Guest Posts by Leo Kolivakis, publisher of Pension Pulse, has done an excellent job of chronicling the problems with pension funds. I certainly encourage people to read his posts.

The headline is from a Bloomberg "exclusive" story. This is the lead in paragraph:

U.S. pension funds contributed to the record $1.2 trillion that private-equity firms raised this decade. Three of the biggest investors, state pensions in California, Oregon and Washington, plunked down at least $53.8 billion. So far, they only have dwindling paper profits and a lot less cash to show the millions of policemen, teachers and other civil servants in their retirement plans.

There is some talk in the article from private equity and pension industry people that these are long-term investments and have patience and it will come back. Yada. Yada. But here is the problem: When will these investments "come back"? In a few years we start feeling the brunt of the "baby boomers" retiring.

Did pension funds underestimate the risk of their investments in private equity?

According to Professor Stephen Kaplan they did:

“With private equity, you’re taking on a liquidity risk, which people did miscalculate,”

This Bloomberg story stood out this morning because another pension fund/private equity fund story hit in the Financial Times: Pension Funds Back Buy-out Fight Over Bank Deals. A coalition of the largest US state pension funds, probably the same ones that have lost 59% of their cash in private-equity, wrote a letter to FDIC backing the private-equity industry's opposition to FDIC's proposed rules regarding purchase of insolvent bank assets. FDIC proposed rules attempt to safeguard taxpayers from the riskiness of private equity investments.

But obviously the pension fund industry doesn't care and they are siding with private equity firms. Could it be that pension funds are at a point with their private equity investments where they have no choice but to "ride this investment out" regardless to where it leads? If so, how did it come to this? Oh, but there is more.

Desperation often leads investors to assume even more risks in the interest of making up losses. Pension funds are taking huge hits not only from their private equity investments but also from their commercial real estate investments. But that hasn't stopped some pension funds from investing more in commercial real estate. A highly risky investment right now.

Are pension funds so desperate to make up losses on their investment portfolios that they are willing to take on more risks?

How did we get to this point - millions of people are counting on their pension funds to be there when the retire in a few years? But will the money be there?

Have pension funds succumbed to Casino Capitalism?

If so, like everything else about this financial crisis it will be middle-class families that will bear the brunt of it!




how much is in CRE?

WSJ has subscriptions so how much are they investing...which is incredible because CRE is being reported as the next neutron bomb or at minimum has not "hit a bottom".

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The article doesn't give a number but

What it says is that pensions are attracted to CRE because of the deep discounts. But then you have articles like this:

"Tanking Real Estate Values Take Toll on Pension Funds"

"Real Estate Woes Threaten Oregon state pension fund"

Are pension funds too desperate?

RebelCapitalist.com - Financial Information for the Rest of Us.

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Here is an example: Ohio PERS & CALPERS

the Ohio Public Employees Retirement System saw its total assets grow by 3% to $50.2 billion year-to-date through June 30, but real estate was a big drag on its results. The fund’s real estate assets, which account for about 8% of the fund’s total assets, dropped 12.2% during the same period to approximately $4.2 billion. The decline was beat only by the drop in private equity holdings, which declined 18.22% for the year.


The bellwether institutional investor reported that the value of total assets under management at the end of June was $180.9 billion, down from $237 billion a year earlier, or a drop of 23.6%.

Real estate values accounted for the biggest chunk of the decline, falling 35.8% during the period, followed by private equity with a 31.4% decline.


RebelCapitalist.com - Financial Information for the Rest of Us.

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Real Estate drag

it doesn't specify if it is Residential or Commercial.

I think that's a key, I trust CR on housing and while they are projecting more price drops, there is also evidence a bottom is in, or close...whereas CRE is just getting started.

Rebel, if you want your post on the front page, hit the up arrow on the left...

people aren't using these arrows to promote to the front page enough.

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Pensions funding the de-scaling of America

I noted this sometime ago (and since I'm somewhat slow, I'm sure I'm probably repeating old news), that private equity firms, utilizing pension funds for the funds of funds (CFOs, etc.), went about on their raping and pillaging of companies (leveraged buyouts, loss of employment, shredding of viable companies), thus the pension funds were helping in the descaling of the American economy.

I've noted some others mentioning that this "healthcare reform" may be nothing more than a backdoor bailout of the insurance industry, and given the amount of insurance-linked securities utilized in the AIG bailout, it's beginning to make a lot of sense.

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Fiduciary Responsibility?

Understanding that capital pools have chased high returns and leverage, isn't it time to remind these pension funds that they have been given a "trust" responsibility for employee pension funds? What does the Governator have to say on the subject? Will they pay their retirees with IOUs? Just when we begin to fret that some entities are "too big to fail," we get the news that our venerable state leaders are standing on the tracks, waiting for the Las Vegas express to arrive. Will Uncle Ben and Uncle Tim be called upon to devise yet another clever program to rescue these American institutions?

Frank T.

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Frank T.

"another clever program"

How about removing the cap on SS taxes and increasing payments for everyone.

Or firing the people who made the bad investment choices and replenishing the losses to the pension funds with federal $ if they submit to more stringent guidelines, and jack up taxes on the class of weasels who caused all the problems (banks, hedge funds, ratings agencies, etc.) with transaction fees or whatever. Jack up the taxes enough to get back all the bailout money over a reasonable period of time. This would result in more deficit spending now while we are facing deflation and then bringing the money supply back in through the taxes during the time that inflation will be a more likely problem.

[I realize that practical solutions like these are not acceptable to the people who run things. So I don't expect their minions Tim and Larry to actually consider anything like this.]


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pension pulse

I added the Pension Pulse RSS title feed to the middle column. I try to put exceptional insight, original writing and also blogs that are maintained (unfortunately some economists abandoned their fantastic information blogs....understandable, a lot of work for no money!), new posts...in the middle column.

I also added the IMF blog, where I'm putting the government affiliated blogs in the right hand column. If you haven't checked out the Atlanta Fed blog....these guys are awesome...

Just generally speaking while I know all are blasting the Fed...on the other hand they give so many cool tools, data and exceptional commentary reports...well, I'm personally thrilled at what they have been doing in that end.

I hope all realize you can just click on the title and it will launch a new tab, (should be a tab!) to read that particular blog post.

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