CalPERS’ CIO Plays Board Like a Fiddle, Uses Trumpian Tactics on Credulous True Believers

At last month’s Investment Committee meeting, CalPERS’ Chief Investment Officer Ted Eliopoulos launched into a bizarre rant against critics that left members of the media both perplexed and bemused by its vagueness and explicit display of victimhood.¹ Because Eliopoulos is understated and has made an art form of presenting with high word to content ratio, one would have to have seen him before, as CalPERS’ board and beat reporters have, to recognize Eliopoulos was also making a show of anger.

The theme of Eliopoulos’ diatribe? That the atmosphere “in the room” meaning the board room, had become so hostile to private equity that, somehow, CalPERS risked not only lose out to its “competitors” among other public pension funds but might even have to abandon investing in private equity entirely. Eliopoulos effectively said that the giant pension fund was unable to handle assessments from unnamed parties who engaged in unspecified “denigration” and “negativity”. His defense was that CalPERS was “arguably” more transparent than its peers and was subject to far more scrutiny than other public pension funds.

And to add to the drama, Eliopoulos had his private equity team sit in the auditorium during his talk, serving as his PR cannon fodder.

Here, as so regularly happens at CalPERS, the inside game trumped doing right by beneficiaries and California taxpayers. As we will demonstrate, Eliopoulos has resorted to a tactic that CalPERS used with JJ Jelincic in his recent board discipline, of engaging in innuendo and refusing to provide any examples of the alleged offenses. Moreover, Eliopoulos’ few concrete claims are almost entirely a combination of misdirections and falsehoods. Not surprisingly, CalPERS doubled down on them officially via a press release from Investment Committee chairman Henry Jones, but clearly penned by the media department, that similarly charged unnamed critics with doing “damage” to CalPERS.

The eye-rolling commentary from members of the press who saw Eliopoulos’ statement shows that he did further damage to CalPERS’ flagging credibility. Eliopoulos came off like a thin-skinned politician who expects to get only positive feedback. Anyone in public office knows or ought to know that he will often be the focus of valid press criticism and dealing with it is part of the job.

Worse, Eliopoulos presented his staff as having their feelers hurt so badly that it was undermining their ability to perform well, when our sources suggest there is considerable support among CalPERS rank-and-file for our critique of its leadership. That suggests that institutionalized narcissism at the executive level is a CalPERS cultural norm. If true, it would confirm the view of law professor and white collar criminologist Bill Black, that CalPERS suffers from a “culture of corruption”. Or as Andrew Silton, in a post that we are also featuring today, put it:

As CIO for North Carolina, I faced frontpage stories questioning the pension’s investment programs, as well as my decisions and motives. Without a doubt the stories were painful. As the leader of North Carolina’s investment effort, it was my job to ensure that the attacks didn’t distract staff. We simply continued to invest. Mr. Eliopolis’s statement to the investment committee only serves to reinforce my critique of CalPERS. The pension plan has a leadership problem.

But lashing out at well-founded reviews of CalPERS’ shortcomings, in particular its lack of knowledge of and undue loyalty to private equity general partners, is straight out of the Trump playbook. The fact that Eliopoulos’ demeanor – soft spoken, Mr. Rogerishly reassuring, cautious to the point of habitually speaking in a heavily coded manner – is the polar opposite of Trump’s does not alter the fact that the emotional strategy Eliopoulos used is pure Trump:

Attack critics on an ad hominem basis to divert attention from the substance of their views

Play up an unwarranted sense of victimhood

Falsely depict the outsiders as a threat to well-being to intensify an “us versus them” mentality

Lay the groundwork for blaming future failings on “them”

A core false premise is that private equity as a “do or die” investment strategy for CalPERS. We’ve presented evidence to the contrary previously and described multiple options for CalPERS that have similar expected returns and do not put CalPERS in thrall to private equity fund managers. But if you were to believe Eliopoulos, too-nasty words from outsiders represent an existential threat to CalPERS’ ability to meet its return targets.

And it worked like a charm. Instead of telling Eliopoulos that if he couldn’t keep his team focused on their duties and contend with press stories he didn’t like, maybe he needed to look for a new job, the board applauded. Yes, you read that correctly. The vast majority of the board members put their hands together, and in a spontaneous show of emotion, clapped at length in support of Eliopoulos’ statement. The orchestrated nature of this event, as demonstrated by the Henry Jones missive, shows that CEO Marcie Frost approved in advance of Eliopoulos’ statement. That means she is also culpable for this management failure.

What Was the Trigger for Eliopoulos’ Pity Party?

We’ve embedded the video of the Investment Committee below. Eliopoulos’ remarks begin at 1:00. To keep the post to a manageable length, we’ve put the transcript of the relevant section at the end of the post.

CalPERS has managed to take a fiasco and compound the damage. Last month, CalPERS was forced to remove and reissue a press release and short video interview it had published after the previous board meeting, in May. Astonishingly staff and board are continuing to try to depict the underlying misconduct as legitimate, as you can infer from the June Henry Jones press release. That only serves to further damage what little credibility CalPERS has left by depicting a clear-cut misrepresentation of data and plan to omit certain charges going forward as pro-transparency. As a former state official put it:

It is a truly bizarre document. I cannot fathom how any competent manager could approve its release. First, it’s just innuendo, since it doesn’t name the parties it is criticizing nor does it specifically say what statements they object to. Second, it takes the story of their false cost reduction claims, which had died down, and revives it.

For those not familiar with the underlying controversy, in May, Chief Operating Investment Officer Wylie Tollette touted a supposed big accomplishment, that of staff achieving investment cost reductions. The problem was that Tollette gave a video interview that knowingly exaggerated the total cost reduction over a six year period by including $121 million in charges that were incurred in the most recent year but had been eliminated from his count.

Even if you accept the argument that the $121 million was not under the control of CalPERS employees and hence should not be used to measure their results, there was no way to defend including an accounting change as a measure of staff results. Rather than restate the historical figures so that the information was presented on a consistent basis, CalPERS simply removed $121 million of charges from the most recent year only. Staff then compared historical data that included those charges with the most recent year where the charges had been excluded, acknowledging the inconsistent presentation only in a footnote. In other words, CalPERS presented total cost reduction figures for a six year period that included a “get rid of costs by not counting them” gimmick.

The initial press release contained the same misrepresentation. The effect was to inflate the reduction in costs from $183 million to $404 million.

If this had merely been one inconsistent line of data in a management information report, that would not have been such a big deal. But CalPERS made this “achievement” the focus of its messaging after its May board meeting.

On top of that, our post on the topic explained how even after you backed out the dodgy accounting, CalPERS was still exaggerating its accomplishments. The fall in investment costs came almost entirely from private equity, and that it turn was due significantly to cyclical factors out of staff’s control. ²

Because CalPERS publishes its slideshows in advance of board meetings, the public could see this ruse before the board meeting. And let us stress that it is correct to call this a ruse as opposed to a mistake or laziness. CalPERS refused to change course even when it was warned prior to the meeting that it was going to get heat over presenting inaccurate information. We held back initially because we wanted to see how CalPERS would present the information at its board meeting. However, private equity reporter Sam Sutton of Buyouts Magazine not only grilled staff, but also issued a story prior to the meeting pointing out the misleading figures. Board candidate Margaret Brown also sent a letter to the entire board calling out the dodgy presentation before the board meeting, again giving staff the opportunity to revise the presentation or the board to do its job by challenging the information. ³

Instead, Tollette tried to have it both ways, by not changing the slide show, but walking through the figures for the last year with them as shown and then verbally adding in the omitted amounts.

In public comments, Brown and fellow board candidate Mike Flaherman again questioned how Tollette presented the data. Nevertheless, immediately after the board meeting, Tollette did a video interview which we called 4 Lies in 25 Seconds: CalPERS’ Wylie Tollette, PR Staff, Keep Cooking Cost Numbers Despite Being Called Out. The media department issued a misleading press release along the same lines. There is no way to pretend that Tollette and the PR staff did not know what was going on, yet they refused to revise their misleading account.

It was only when the Wall Street Journal threatened to write about the obviously bogus presentation that CalPERS backed down. But the Journal reporters appeared to be pretty annoyed by their interactions with CalPERS staff (one reporter spoke to me about how difficult CalPERS had been on this topic). As we described, the Journal took the virtually unheard-of step of trolling CalPERS by bringing up Tollette’s earlier gaffe, from two years ago, of saying that no one, including CalPERS, could obtain private equity carry fee data, which was patently false.⁴ The resulting press criticism forced CalPERS into a rapid retreat.

As we described in some detail, the Journal also made fun of CalPERS’ fetishization of its in-house private equity database, PEARS. With the benefit of hindsight, it’s not hard to see why the Journal ran a headline, ONLY ROBOTS CAN TALLY WHAT THE LARGEST U.S. PENSION FUND PAYS IN FEES. CalPERS has too often depicted well-established database technology as something special. As of 2014, CalPERS has invested in just a bit under 900 funds (during a painful and protracted Public Records Act Request, it took CalPERS more than six months to come up with a figure as to how many private equity funds it had invested in. That should have set off alarms). A database with roughly 1000 entries, even with many data items per entry, is trivial in the world of databases. Banks handle millions of customers and ginormous numbers of transactions. Even political scientists have databases with million of data items. By repeatedly depicting PEARS as a heroic accomplishment, when it was a modest sized software project that took a curiously long time to implement, CalPERS opened itself up to ridicule, which the Journal dished out with relish.

To put this more tersely: if Eliopoulos thinks his problem is that CalPERS’ reputation is taking a hit, he needs to stop shooting messengers and clean up the underlying conduct.

Instead, by engaging in innuendo and lashing out at critics, he’s made matters worse by refocusing media attention on CalPERS’ recent own goals. For instance, in a podcast by PEHub editors Chris Witkowsky and Sam Sutton, which was supposed to be about When PE Firms Sell Themselves, more than half wound up being about CalPERS’ fiascos, as you can hear starting at 11:06, that both writers were unable to refrain from laughing at CalPERS, for instance, about how it tries to “rationalize its private equity costs”. At 20:21, Chris Witkowsky described Eliopoulos complaint about the attention it gets as as “whining”.

CalPERS shouldn’t expect to get the benefit of the doubt since its pay to play scandal and now its serious underfunding. And it’s got no logical basis for complaining about undue press attention. It gets it because is almost double the size of the next biggest public pension fund and is a bigger deal to California and public pension funds generally than any other single player.

Contrary to Eliopoulos, CalPERS Has Been Retreating From Transparency

Eliopoulos tried to depict CalPERS as one of the most transparent public pension funds with respect to private equity. In fact, CalPERS’ own consultant, CEM Benchmarking, disagreed with this assessment.

CEM issued an authoritative report in 2015, triggered by the fact that one of its clients, South Carolina, was reporting far more private equity fees and costs than other public pension funds. CEM provided specific examples of how typical reporting falls short of the standard set by South Carolina, which CEM depicted as representing best practice.

Even though this report was issued in 2015, CalPERS still has refused to adopt some of its most basic and easily implemented recommendations, such as reporting the full amount of its biggest single private equity cost, the annual management fee, rather than reporting only the portion it is billed directly and ignoring the large component shifted onto and effectively paid by the funds’ portfolio companies.

Moreover, Eliopoulos has yet again tried to mislead the board and public by depicting the private equity database PEARS as essential to better private equity reporting. This is false. CalPERS could have captured the data in spreadsheets but the Wall Street Journal story on PEARS suggests that CalPERS had done a slipshod job of managing that way. CEM stressed that at South Carolina, the process was heavily manual due to the nature of the information gathering required:

To correct the timing issue, the validation process is performed on a quarterly basis…Based on other provided data such as contributions, invested value and distributions, the expected full management fee and performance fee are compared to the partnership contract terms. SCRSIC reconciles their manual calculations from the contract terms to the fee amounts provided by the managers. If there are material discrepancies, SCRSIC asks for explanations and documents the changes for future validations.

While the vast majority of managers comply with the SCRSIC process, a few managers do not complete the template. For those accounts, SCRSIC manually collects data from statements that are provided and asks for any missing figures. Since this process is more manual, it is more time‐consuming.

The ability to collect and confirm reasonableness of cost data from PE managers relies on a strong understanding of the partnership contract terms and constant communication with managers. As a result, implementing such a validation process requires resources.

Not only has CalPERS not adopted basic practices advocated by CEM, contrary to Eliopoulos’ assertions, it been retreating from transparency via its attempt to exclude the $121 million of fees for 2016 above, as well as its plan to combine private equity and public equity into one “growth” unit, which will reduce private equity disclosure even further.

Contrary to Elopoulos, Outside Pressure Has Benefitted CalPERS

But what about Eliopoulos’ claim that CalPERS is “arguably” more transparent than other public pension funds in its private equity reporting?

The reality is the few places where CalPERS stands above most of its peers were forced by media pressure. The first was the 2002 settlement of a suit by the Mercury News. CalPERS agreed to publish quarterly return and other data for each of its private equity funds. More recently, the 2015 gaffe by Wylie Tollette, in which he falsely stated that no one could report carry fees, led to media blowback that forced CalPERS into a rapid retreat of gathering the data it had just said was unobtainable. When it presented the total carry fee data in 2015, CalPERS acted, as it does now, as if it had made this move of its own volition, as opposed to escape further ridicule.

Similarly, former CalPERS board member, now private equity researcher and board candidate Mike Flaherman flagged a risk to CalPERS at a December 2015 board meeting, that of the growing use of another layer of leverage at private equity funds through the use of borrowing at the fund level, in addition to the already-high level of leverage at the portfolio company level. We wrote about this in 2016: Private Equity’s Latest Con: Using Fund-Level Borrowing to Juice Reported Returns While Increasing Investor, and Even Systemic, Risk.

Investment Committee chairman Henry Jones directed staff to bring back a report. That would normally imply putting the matter on the agenda and having formal briefing and taking questions from the board, but that never occurred. Instead, a Public Records Act request which we published later revealed that Ted Eliopoulos had provided a cursory-to-the-degree-of-being misleading barely two page document that looked to have been cobbled from general partner materials touting the new gimmick. Nowhere did it mention any risks.

This year, Oaktree Capital’s Howard Marks, who writes one of the most widely read newsletters in finance, echoed our concerns and added additional ones. For instance, general partners can use these subscription lines of credit to increase their carried interest payouts at the expense of limited partners like CalPERS. Marks also stressed that the subscription credit lines would also artificially boost fund performance, meaning that taking on additional, hidden risk would increase staff compensation.

Flaherman brought up the risk of subscription credit lines again, in the May 2017 board meeting, citing his own and Howard Marks’ concerns. Instead of taking Flaherman’s warnings to heart, the response from the board was for member Richard Costigan to take umbrage at the notion that there might be gambling in Casablanca, as in staff gaming of compensation.

As we wrote:

Needless to say, if you need confirmation that the board is content to not even do the basics of supervision, like monitor conflicts of interest, you have it on tape.

Amid the kerfuffle, the normally toothless ILPA, the trade group for private equity investors like pension funds, warned that limited partners like CalPERS needed to be more vigilant about the issue: ILPA Issues Guidance for Limited Partners on Subscription Lines of Credit Used by Private Equity Funds.

Eliopoulos Justifies Present Failures and Lays Groundwork for Shifting Blame for Future Ones

Eliopoulos made a remarkable admission in his complaint:

I read a wonderful quote from the former CEO of the Norges Fund in the Financial Times about investment strategy. He said and I quote, “You should never go for a more advanced investment strategy than your governance allows”.

We may have reached that point with private equity at CalPERS.

Amazingly, Eliopooulos concedes the point we’ve been making for yeas, that CalPERS has woefully deficient governance, to the degree that CalPERS beneficiaries, California taxpayers, and the state legislature should be concerned. However, he acts as if he and other leaders at CalPERS have nothing to do with this dangerous situation. There’s no willingness to accept responsibility when he is far and away the highest paid individual at CalPERS. We are to believe that somehow this sorry situation came about despite “Herculean efforts” by the members of his staff along with the assistance of other professionals at CalPERS as well as its board. In other words, by implication, the problem is external saboteurs.

That is nonsense. The reality is that CalPERS has for years expended a great deal of effort fighting the lone board member, JJ Jelincic, who has asked what ought to be not terribly difficult questions about private equity fees and cost. Bear in mind that it is a cornerstone of fiduciary duty to evaluate an investment strategy’s costs and risks as well as its potential returns. The energy expended trying to undermine Jelincic and discourage the board from questioning staff actions sthat could have been directed to better ends.

Even worse, CalPERS has doubled down on this counterproductive approach in face of evidence of how it is backfiring. Staff is spending more and more time trying to tamp down media embarrassments resulting from its dubious defenses of private equity and its years-long campaign to muzzle Jelincic.

By contrast, in the days when CalPERS was a much higher functioning organization, a core group of board members would regularly do the heavy lifting of examining the monthly reports to the Investment Committee in detail and would engage in robust discussion with staff on private equity and other topics. And as we’ve pointed out, it’s not unreasonable to expect CalPERS’ board and staff to perform at that level. The CalSTRS board has a vastly better understanding of private equity than the CalPERS board does. The CalSRS board also routinely challenges staff recommendations, which virtually never occurs at CalPERS since the board has acquiesced to a power grab by staff.

Former North Carolina CIO Andrew Silton explained the game Eliopoulos and CalPERS top executives are playing in a recent post:

When an investment isn’t working out very well, the first step is to acknowledge the problem. CalPERS has taken the opposite posture in addressing the shortfall in its private equity program. Moreover they have engaged in the very behaviors that would require the average retail investor to fire her broker or financial advisor. If one of CalPERS’s outside managers utilized one of these tactics they too would be terminated…

Rather than accepting poor performance, attack your critic.  If a consultant or board member raises concerns about performance, make that person or organization a target.  This tactic will not only deflect attention, it will also intimidate other board members or advisors from asking hard questions about the performance shortfall…

Instead of admitting to poor performance, change the benchmark.  If the investment performance of a money manger or an asset class, such as private equity, trails the benchmark, attack the benchmark.   The idea is to excuse failure by impugning the standard of comparison.  The staff and consultants at CalPERS have been trying to tell its board and the public that the shortfall in performance is largely the result of a benchmark that isn’t appropriate.  Ironically those are some of the same professionals who proposed the benchmark in the first place.

To further obscure bad performance, change around the asset classes, known in the industry as “buckets”.  In the case of CalPERS, they want to combine public and private equity into one big bucket…in order to make proper evaluation of their investments much more difficult.

The beneficiaries of CalPERS do not have an advocate challenging the performance of private equity.  The pension’s investment professionals, consultants, and board members have aligned to bury the problem.  This is how America’s leading pension plan has become a laggard.

Moreover, Eliopoulos tried claiming that media comments on CalPERS’ private equity shortcomings will hurt CalPERS’ ability to “compete” in getting into funds. If there was any reason that investors have been avoiding CalPERS, it’s that its recent head of private equity, Real Desrochers, was widely regarded as difficult to work with.

In a post we are featuring today, Silton lambastes Eliopoulos’ claim that CalPERS will have trouble getting access to funds and flags the real reason performance is likely to underwhelm:

As long as the pension continues to make eight and nine figure commitments, PE firms will keep flocking to Sacramento. In private equity, as with much of investment management, it’s all about the money…

Since CalPERS began allocating large amounts of capital to PE nearly 30-years ago, public pensions and sovereign wealth funds have flocked to the asset class. The edge CalPERS had as a first-mover has been eroded. Moreover, the universe within which CalPERS can invest, while deploying a meaningful amount of capital, has shrunk. Only a small number of PE firms have the scale, resources and relationships to deploy the large amounts of capital required for CalPERS to have a meaningful PE allocation. In other words, CalPERS no longer has the luxury of exploring emerging and niche strategies that offer the potential for extraordinary returns. Those opportunities tend to be too small to make a meaningful difference to the pension.

On top of that, Eliopoulos touts an idea that we’ve debunked for years, that private equity investors can out-compete each other. From a 2014 post:

When you boil it down, this graph illustrates the ugly truth of investing in private equity: it’s not attractive unless you can outrun most of your peers investing in the asset class.

Rather than question the logic of investing in private equity at all, everyone in the industry has convinced themselves that it is reasonable to believe that they can be the Warren Buffett of private equity…

Fundamentally, this is an intellectually dishonest exercise, and diametrically opposed to the way many public pension funds construct other parts of their investment portfolios. With public equity in particular, it’s almost certain that a significant majority of U.S. pension fund assets are invested in index funds. That’s because pension funds have recognized that, collectively, they cannot do better than average, and that after paying active management fees, actively managed public equity portfolios typically perform worse than the market average.

So it’s not as if these investors are so clueless that they can’t grasp the point that all of them cannot achieve above average results, let alone significantly above average results. Instead, with private equity, there is a desperate desire to be in the asset class for reasons that probably reflect a combination of intellectual capture by the PE managers, political corruption in legislatures that control public fund board appointees, and the need to have a strategy that could conceivably solve the pension underfunding problem over time.

So why does Eliopoulos mislead the board by trying to pretend that CalPERS can and should try to out-do other private equity investors? Because its own experts, such as Harvard Business School professor Josh Lerner, have said it’s not worth the extra risk and hassle to invest in private equity unless you can beat average returns.

CalPERS Needs More, Not Fewer, Candid Assessments

CalPERS has only itself to blame for the fix it is in. It has come to believe its own PR, much of which is misleading or flat-out false, starting with its claims about its transparency. Only by dint of clinical, pointed descriptions of both CalPERS’ considerable weaknesses in private equity and its corrupt culture at the board and executive leave has reality begun to penetrate CalPERS’ bubble in Sacramento.

We have no doubt that there are many CalPERS employees who have been deeply disturbed by the spectacle of general counsel Matt Jacobs repeatedly and flagrantly lying at board meeting, of Wylie Tollette lying by presenting obviously and knowingly presenting false information to CalPERS’ beneficiaries about investment cost reductions, and of staff and board repeatedly ganging up on the one board member, JJ Jelincic, who tries to do his job by asking questions about pending decisions instead of rubber stamping staff requests. Those diligent staff members similarly can’t have much respect for board members like Bill Slaton, who had the temerity to attack a public commentor who aptly called out Tollette’s retracted video cost reduction claims as a lie with the intelligence-insulting defense that Tollette wasn’t knowingly misrepresenting.

CalPERS needs to wake up from its stupor of narcissistic self-regard and performance grade inflation. The fact that it’s taken years of scrutiny to finally get a reaction is an indicator of how deeply dysfunctional the organization had become.

The real reason for Eliopoulos’ whinge isn’t that the critics have been unfair or inaccurate. It’s that on a deep level, he may recognize that they are correct. The implication is that he and other members of CalPERS senior management need to go.

____
¹ This is not our opinion. One reporter e-mailed a mutual source immediately after the Eliopoulos remarks, at a loss to understand the point. As we note later in this post, in a podcast nominally about private equity firms selling themselves, PE Hub reporters Sam Sutton and Chris Witkowsky couldn’t refrain themselves spending nearly half the podcast to the “great private equity saga at CalPERS” and laughed at the Eliopoulos speech. Another CalPERS’ commentator called Eliopoulos’ remarks a “pity party”.

² We explained at some length why the revised figures are misleading, and CalPERS’ depiction of the cost reduction as due solely to its own efforts even more so. Due to the staff preference for “managing” the board rather than making bona-fide efforts to educate it, the staff presents one set of figures to depict its investment costs. The use of single metrics for complex phenomena is never a good idea, and that is what caught staff out here. At least Eliopoulos and Tollette, and potentially other members of CalPERS’ investment staff have some of their bonus based on containing investment costs. Private equity fees and costs are the single biggest source of total investment costs. Many of those fees are opaque, for instance, by virtue of being charged to the portfolio companies purchased by limited partners like CalPERS, but not disclosed to them. The incentives of CalPERS’ staff, despite its professed enthusiasm for the Institutional Limited Partners’ Association fee transparency initiative, is not to get to the bottom of private equity fees and costs. The proof of the pudding is that, as we detailed at length last year, CalPERS worked to weaken a private equity fee transparency bill while pretending in public to support it. Similarly, CalPERS is not a leader in private equity fee transparency. Its own consultant, CEM Benchmarking, has put South Carolina at the font of the pack. CalPERS is among the pension funds estimated to report only about half the total private equity fees that they could get at.

The reasons CalPERS’ revised press release is still misleading is that it fails to include charges that should be counted as part of total investment costs, such as portfolio company fees Moreover, the press release misleadingly attributes the cost reduction to the efforts of CalPERS employees. As we described at some length in this post, cyclical factors played a very substantial role in the fall in private costs, and may well be the sole cause. By contrast, the cost reduction outside private equity was de minimus, a mere $3 million.

As law professor Adam Levitin stressed, what matters is total investment costs. CalPERS needs to make more vigorous efforts to obtain this information. It should disclose total costs. It could also have a separate report for managerial purposes that parsed out the ones under staff control and use that for performance measurement purposes.

³ CalPERS may attempt internally to justify its actions by claiming it did the right thing by contacting one of its consultants, Meketa Investment Group, as we learned via our Public Records Act request #3187. What the documents we obtained show is that no one was interested in getting to the bottom of the matter and determining whether the Margaret Brown was correct and the presentation of information needed to be changed. Instead, the records show CalPERS staff and board cared only about how to manage the optics and defend CalPERS’ position. It is also clear that Meketa understood its marching ordered and delivered the sort of document its client wanted while artfully sidestepping endorsing the misrepresentation. As one private equity consultant said via e-mail:

I am utterly appalled by Meketa’s response. They essentially agreed with Margaret Brown’s critique but managed to string words together in a way that made it sound like they thought she didn’t know what she was talking about. They deliberately misconstrued her argument by claiming that she wanted the fund expenses counted as part of the management fee line item, when her email was quite clear in criticizing not the dis-aggregation of the management fees and fund expenses but the complete disappearance of the fund expenses. Further, they also acknowledged that this disappearing of fund expenses could positively affect CalPERS employee bonuses, but again acknowledged it in a way that seemed to discredit the concern.

The proof of the pudding is that if the Meketa document actually did what the board members (who clearly read it superficially) apparently thought it did, CalPERS could simply have handed the report to the Wall Street Journal and stood its ground rather than having to take down and reissue the press release and Wylie Tollette video.

⁴ Tollette does not deserve sympathy for this gaffe. JJ Jelincic had asked Tollette about carry fee data months before. Tollette ducked the question. He had time and warning to get the right information since Jelincic regularly asks about fees and costs.

Eliopoulos at June 2017 Investment Committee