Dan Primack of Fortune has weighed in on what he calls the private equity “mess” at CalPERS, in an important new story, “CalPERS still can’t get out of its own way on private equity.” I strongly urge you to read it in full, but here are some key points:
Primack confirmed that Réal Desrochers, CalPERS’ Managing Investment Director of Private Equity, was “factually wrong” in his presentation to the Investment Committee in August. He also reports that some of his correspondents were “stunned” by the exchange between board member JJ Jelnicic and Desrochers that we reported in one of our CalPERS’ posts, on how management fee offsets, a common feature in private equity agreements, work.
Intriguingly, Desrochers has always kept or been kept away from the media:
I have never spoken to Réal Desrochers. And it’s not for a lack of trying. I asked to interview him when he first got the job, when the carried interest issue arose and now this week (plus, I believe, at least one other time). Always denied. In fact, I can find only one media interview ever with Desrochers since he took over at CalPERS, in a trade publication that asked about what kinds of funds he was interested in backing.
To be clear, I realize that neither I nor other reporters are entitled to speak to Desrochers. CalPERS has regularly made others, including CIO Ted Eliopoulos, available. But it’s always been strange that the man who was brought in to make CalPERS more transparent and responsible is either scared of the media or considers it to be beneath him. And, as I explained to the CalPERS spokesman, it leaves me with only Desrochers’s public testimony with which to judge his understanding of fee offsets and the like.
Primack also says that CalPERS had an unscheduled meeting on this past Monday, and the participants included the CEO, CIO, general counsel, and Desrochers, and it was
…..largely centered around what had happened during the investment committee meeting. It is notable that the meeting was called after the [Naked Capitalism] blog post appeared, not after the actual meeting (which had occurred 14 days earlier).
As telling in its own way was a September 1 story in Private Equity International about the August Investment Committee meeting titled “CalPERS receives lesson in PE 101.” It gave a very brief summary of the two lines of questioning we’d focused on in our posts, one by Priya Mathur on whether the general partners were making too much on management fees (to which Desrochers gave the response, “They should not get rich on the management fee,” when as we demonstrated, they do) and the management fee offset questions from Jelnicic, which were the focus of Primack’s story. PEI noted:
The meeting video has drawn intense scrutiny from one of the media’s most vocal private equity critics, Yves Smith, author of the Naked Capitalism blog. Smith is dissecting the video in a two-week series called “CalPERS’ Private Equity Exposed” with posts like “CalPERS Staff Demonstrates Repeatedly That They Don”t Understand How Private Equity Fees Work.”
As one former private equity partner said to me, “When the PEI, the publication most faithful to the private equity industry, won’t attempt a defense of CalPERS, it says there isn’t one.”
It’s gratifying to see the financial media take interest in this story during what is normally a slow news period, and to be so gracious as to cite our coverage. I anticipate that other shoes will drop when more people are back at their desks next week.
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Great work on this, Yves. I read all of your PE coverage and find it enlightning (and disturbing in so many ways).
Have a great weekend
Naked Capitalism: Very arguably the best site on the web right now.
Seriously, I love this shit. Staff of 1.3, NC.
Meanwhile, with high-yield credit spreads having spiraled up from 3.5% in June 2014 to 5.7% now, private equity’s economics are facing some nasty headwinds:
https://research.stlouisfed.org/fred2/series/bamlh0a0hym2
… as Calpers’ sister institution CalSTRS considers moving $20 billion out of equities in November.
You think they got time?
Great stuff!! Please take a vacation from your labors this weekend :)
It must be so gratifying to see the financial press follow your lead, Yves. But, more importantly, it must be gratifying to know that by focusing a spotlight on private equity fees and the poor stewardship of the largest pension funds, you may have done more to protect the pensions of millions and millions of wage earners from private equity pillage than anyone on the planet. Thank you.
This series of articles has been really eye-opening. I’d encourage others who don’t have an economics background to read them. The material is understandable, and we need this information.
The transcripts plus videos, with exegesis, are especially valuable. They hang themselves with their own words.
Thank you, thank you, and thank you again, Yves. I religiously read ever word of your articles about PE, especially in relation to CalPERS and their lack of transparency re their investments in PE. I’m happy to see you quoted by Dan Primack. This is great news, and good to see someone like Primack calling attention to the PE “mess” at CalPERS. Plus also how it appears that no one can get Réal Desrochers to talk to the media (or, apparently, almost anyone including the CalPers Board).
Enough is enough. If Desrochers was brought in to enable more transparency at CalPERS, then, as a CalPers contributor, I say: Desrochers has FAILED at his job and appears to have FAILED stupendously. Time for a change. I’d like to feel some level of confidence that, as a future annuitant, I might have some of MY money to collect in my old age. I’m tired of PE grifters skimming from the funds for their own enrichment.
Keep up the good work. Even on a Friday before a holiday long weekend, citizens are watching, reading and keeping track.
Congrats on a job well done and have a well earned rest.
Many more emperors to disrobe after the hols.
“An unscheduled meeting on this past Monday.”
That sounds interesting. Circling the wagons won’t help them at this late stage. May I suggest (switching metaphors) consideration be given to the Russian sleigh maneuver? (Throwing a passenger out of the sleigh to distract the pursuing wolves….)
“As one former private equity partner said to me, “When the PEI, the publication most faithful to the private equity industry, won’t attempt a defense of CalPERS, it says there isn’t one.” ”
Yes. Desrochers’ and the board’s defenses sound like a falsely premised argument from authority where they believe the premises are true. Your reporting may be waking them from their comfortable illusion. More importantly, your reporting may save pensioners some serious financial grief.
Great, great work, Yves. Thank you.