California unions push CalPERS to share data behind private equity investments
A coalition of California unions wants more transparency around public pension funds’ private equity investments to measure their performance and to shine a light on the companies owned by these often opaque firms.
The new disclosure requirements outlined in the “Private Equity Sunshine Act,” are likely to lead to a fight over how much information private firms should be required to share with the public when receiving significant investments from public employees’ retirement systems. Labor groups are on one side of the debate, local governments, investment executives and pension managers are on the other.
The bill, authored by Sens. Dave Cortese, D-San Jose, and María Elena Durazo, D-Los Angeles, sailed through the Senate Judiciary Committee hearing on Tuesday with bipartisan support. The bill’s backers include state Treasurer Fiona Ma and the California Federation of Labor Unions.
“SB 1319 ensures that Californians have access to basic information about private equity firms that charge high fees to our public pension plans and often abuse private sector workers,” said Susan Minato, co-president of UNITE HERE Local 11, which is one of the bill’s sponsors.
Opponents say the relative lack of transparency around private equity is a core reason why these investments outperform other public assets. If the Legislature requires the California Public Employees’ Retirement System and other public pension systems to disclose detailed information, it could put those funds at a disadvantage.
“When given a choice between an institutional investor that does not have onerous, significant reporting requirements, and one that does, firms that have the ability to be selective in that way, which are typically the top firms, will more than likely choose not to take on the burden of the responsibility,” said Robert L. Greene, president and CEO of the National Association of Investment Companies.
A recent report by the American Investment Council found that private equity outperformed public markets over longer time periods. The council found that, over a 20-year period, returns from private equity exceeded gains in the S&P 500 index by 4%.
SB 1319 faced no formal opposition during Tuesday’s hearing, but two days later a group of local government associations sent a letter to the chair of the Senate Committee on Labor, Public Employment and Retirement, which will hear the bill next, opposing the disclosure requirements.
Requiring public pension funds to publish details of their portfolios could lead to losses in investment returns, resulting in higher contribution rates for public agencies and public employees, the California State Association of Counties wrote.
Transparency has multiple benefits, supporters say
The labor-backed measure would force CalPERS and other pension funds to report on how well their private equity and private debt investments perform against public market benchmarks.
Cortese used the Dow Jones Industrial Average as one example of a securities index that private equities’ performance could be compared against. The San Jose Democrat said his push for transparency would provide a better view of where public employees’ pension dollars are being invested and how successful those investments are.
“It’s hard to imagine the largest pension fund in the fifth- or fourth-largest economy of the world, suddenly having a mass exodus of private equity folks on the basis that you can just go elsewhere,” Cortese said.
Greene said the private equity industry benefits from having hidden investment strategies. These investments have generated significant returns in recent years because private equity is not subject to the same regulations and practices of public companies, he said.
“At every single minute of the day you can check the valuation of a public company stock,” he said. “You can’t do that as easily with private equity, because there’s no active hourly, daily, or even for that matter, monthly monitor to compare it to.”
Possible leverage for unions
Unions see another benefit of the bill. It would provide greater transparency by requiring private equity firms with partnerships to California public pension funds to report their assets’ identity, location and number of workers employed at those companies. That information could enable labor groups to identify non-unionized workplaces.
The unions sponsoring the legislation pointed to private equity’s significant presence in California. The Golden State is home to more than 2,600 private equity-backed companies, which employ 1.5 million Californians, according to the American Investment Council. Collectively, CalPERS and the California State Teachers’ Retirement System have over $300 billion invested in alternative investment firms such as private equity, the unions reported.
By gaining a better view into how private equity-owned companies operate, unions can keep a closer eye on how those enterprises treat workers and more closely monitor them for potential investment risks, said Courtney Alexander, a senior researcher with the United Food and Commercial Workers.
“I firmly believe transparency is in the interests of the people who these investments are made on behalf of and the people who have to work for them on a day-to-day basis as employees,” she said.
Effort comes a decade after another transparency push
This isn’t the first time the Legislature has demanded more transparency from California’s public pension funds.
In 2016, California lawmakers passed a measure that requires the pension system to report on fees paid to external investment managers.
At the time, CalSTRS expressed concern with the legislation, arguing that these disclosure requirements could push managers away from California public pension funds and toward investors in other states.
But in the decade since, California’s public pension systems have deepened their relationships with private equity. According to CalPERS’ latest budget proposal, the retirement system expects to spend $2.2 billion on external investment management fees in the upcoming fiscal year, which represents a $421 million, or 24%, increase compared to the allocation in the fund’s current budget.
Much of that increase is due to CalPERS shifting more of its assets to private equity, staff told the board of administration this week.
The massive pension fund, whose assets were valued at $619 billion on Friday, has faced scrutiny from some over the system’s pivot toward private equity. Last year, a group that represents retired public employees announced it was planning to investigate how much money the fund spends on fees to external managers and other aspects of CalPERS’ investment strategies. The Retired Public Employees Association is also a supporter of SB 1319.
CalPERS staff briefed its board on the private equity transparency bill earlier this week and warned that the legislation could put the pension fund at a competitive disadvantage with retirement systems in other states.
Danny Brown, the chief of CalPERS’ Legislative Affairs Division, warned that the bill posed “legal, reputational and operational risks.”
“It could negatively impact the overall returns of the retirement fund, resulting in increased contribution. It can limit our access to venture and growth funds that drive innovation and job growth in California. It could jeopardize our ability to grow our investments and partnership with emerging and diverse managers,” he said.
A CalPERS spokesperson said the agency would not take a position on the bill until the board of administration had an opportunity to review it.
The bill will be heard in the Senate Committee on Labor, Public Employment and Retirement on Wednesday.
