State officials question CalPERS’ private equity investment efforts

By Devara Berger, special to CalMatters

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Public employee retirement security depends on the integrity of the California Public Employees Retirement System (CalPERS). However, its chief executive, Marcy Frost, steers the fund toward high stakes bets on private equity and private credit, raising exposure to 17%. While Frost frames this as a twista closer look reveals a pattern of misrepresentation and hidden fees designed to enrich Wall Street at the expense of Californians.

Faced with low returns and a multibillion-dollar funding shortfall, CalPERS shifted from stable traditional assets to an aggressive alternative model. This revision raised the target private equity allocation to 17% and established an eventual target of 8% for the newly introduced private credit portfolio.

Unlike public stocks with transparent prices, private equity assets are valued by the managers who manage them. Managers use internal formulas to assess what a company is maybe worth, not what someone is actually willing to pay for it today.

By updating values ​​infrequently, private equity managers “smooth out” market declines. This creates an illusion of stability, allowing Frost to report “strong” returns even as the broader economy struggles.

Although high-risk markets can provide significant profits, they come with significant drawbacks. Chief among them is the troubling lack of transparency.

Labor coalitions and pensioner associations have recently pushed for transparency Senate Bill 1319The Solar Law of Private Equity. It would mandate public benchmarking and asset disclosure.

CalPERS mounted an aggressive disinformation campaign to kill the bill. The increased transparency is said to result in billions of dollars in lost returns and force a sharp increase in employee contributions. This speculative and questionable narrative helped kill the bill. The result is that CalPERS keeps members blind to structural risks until large losses occur.

Furthermore, Frost’s claims to superiority are often based on shifting beams. CalPERS often compares private equity performance to specialized private stock indexes, not the S&P 500. Over the past five years, common, low-cost public index funds have often matched or beaten CalPERS’ expensive private equity portfolio — without charging multibillion-dollar fees.

Then there’s the fact that private equity valuations lag public markets by three to nine months. When the stock market crashes, private equity valuations remain artificially high for months. Frost often uses this window to claim “pre-emption”, effectively taking credit for delaying bad news.

Frost has publicly stated that CalPERS wants more data from its partners and has boasted about how transparent CalPERS is. But at the same time, CalPERS continues to shield limited partnership agreements from the public. The truth is, you can’t have it both ways. These private agreements often contain hidden fee structures or terms that the public — even the CalPERS Board — never sees.

What Frost does not discuss is that CalPERS has adopted a “whole portfolio” approach that depends heavily on private equity investments, an approach that CalPERS wishes to protect.

CalPERS created a massive transfer of wealth from government officials to Wall Street. While Frost claims to have reduced management fees, these “savings” are often eaten up by “carrying” (or execution) fees and administrative costs that remain protected.

If these mirage gains don’t materialize, it’s civil servants who face potential cuts in income or increased contribution requirements. Mediocre or huge losses don’t bother Frost, who continues to collect huge bonuses and pay raises while CalPERS lags behind others pension systems.

it remains underfunded at 79% and carries $179 billion in unfunded pension liabilities.

Public officials are being told a story of “specialist approaches”, but the reality is that they face high fees and returns that struggle to beat a major index fund. When the person managing your money refuses to show you the contracts, that’s not “private” investing — that’s a lack of accountability.

CalPERS members must require full disclosure of all fee arrangements. Our retirement security is too important to be ignored.

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.