CalPERS Private Equity Investment Returns on Course for Serious Deterioration

by: Tyler Durden

Two years ago it was said that you if had a direct line to the CIO of CalPERS, one of the nation's largest public pension funds, and specifically to its Alternative Investment Management group, you had it made. None of that Goldman Sachs partners being masters of the universe garbage - this was the real deal.

Say you needed $100 million for fund XYZ - you simply dialed that one number in Sacramento, and if you made it past the secretary, you were golden. Of course, this worked best if your name started with Leon and ended with Black, but other managers were also sitting pretty. The reason for this is that unlike the public pension funds of New York State for example, where the bulk of the investments were in the public markets via an internal asset manager (who was pretty horrible at his job judging by the fund IRR), and only occasionally did NY invest in external private and public fund managers (which more often than not included a variety of kickbacks, bribes, and other illegal schemes as recently reported by NY's own Andrew Cuomo), CalPERS has the bulk of its assets invested in 3rd parties.

While Thomson Banker gives the total amount of CalPERS public investments at $38 billion, an obscure site within the CalPERS website labyrinth presents the amount allocated and invested in various 3rd parties. And the amount is staggering: it seems that a vast number, maybe even a majority of U.S. private equity firms, owe their existence to CalPERS.

Here are the facts (as of September 30, 2008):

  • Number of unique investments: 290
  • Total Capital committed: $53.2 billion
  • Cash Invested: $30.8 billion
  • Cash Distributed: $17.4 billion
  • Cash Distributed Including "Residual" Value: $38.8 billion

It is that last number which we will focus on shortly...

But some more data first.

CalPERS had $173.6 billion in total assets at March 26, which represents a loss of 26.6% after costs between July 1, 2008 and January 31, 2009. The full January 31 CalPERS asset summary can be found here.

Additionally, CalPERS seems to be suffering from the book-to-market marking syphilis that is pervasive throughout Wall Street: book value of CalPERS' assets was $194.9 billion at January 31, a non-trivial $21.3 billion overestimation of its market value. We would venture to guess which of these two numbers is used for pension actuarial purposes, but the answer is likely quite obvious. Interestingly, in the same report, the value of AIM investments had a $27.4 billion book value, and an even worse $23.9 billion market value. While I am not sure how this number compares to the $38.8 listed above as total investments plus cash outs, or the $21.4 billion of net (38.8-17.4) AIM value at September 30. However, if the superficial conclusion is that the market value of private equity investments between September 30 and January 31 increased by $2.5 billion, then we may have some very serious credibility issues on our hands.

Here is what CalPERS says about its Alternative Investment Management program:

Since inception in 1990 to September 30, 2008, the Alternative Investment Management (NYSEMKT:AIM) Program has generated $14.2 billion in profits for CalPERS. Given the young, weighted-average age of the portfolio (3.2 years) this amount will continue to grow as the portfolio matures.

CalPERS may need to adjust this mission statement once the December 31 numbers are out.

But continuing with the facts. Here are the asset managers that have benefited the most from CalPERS generosity, based on both total capital committed and actual cash invested (this is not an exhaustive list of CalPERS investments).

Apollo: $4.1 billion, $2.7 billion

Aurora: $650 million, $267 million

Avenue: $1.4 billion, $780 million

Blackstone: $1.4 billion, $1.2 billion

Candover: $643 million, $480 million

Carlyle: $4 billion, $2.1 billion

CVC: $2.3 billion, $1.3 billion

First Reserve Fund: $1.1 billion, $685 million

Leonard Green: $850 million, $455 million

Hellman & Friedman: $1.0 billion, $762 million

KKR: $1.6 billion, $880 million

Levine Leichtman: $450 million, $389 million

Lexington Capital: $400 million, $392 million

Madison Dearborn: $710 million, $634 million

MHR: $400 million, $218 million

New Mountain: $550 million, $165 million

Oak Hill: $375 million, $151 million

Pacific Corporate Group: $1.9 billion, $800 million

Permira: $573 million, $388 million

Providence: $525 million, $297 million

Silver Lake: $1.1 billion, $450 million

Tommy Lee: $640 million, $475 million

Tower Brook: $575 million, $220 million

TPG: $3.2 billion, $1.5 billion

Wayzata: $325 million, $218 million

Welsh Carson: $650 million, $601 million

WLR: $698 million, $405 million

Yucaipa: $764 million, $481 million

And many others... But you get the gist: Apollo, Carlyle, TPG, CVC, Silver Lake, Blackstone, and Avenue pretty much hold the fate of the majority of California's teachers and public workers in their hands... And that future is looking really, really ugly.

We dig in: Among the other data, presented on the CalPERS AIM page is the public IRR disclosed per fund. This is probably the best indication of how some of the more troubled private equity firms are gaming the system, and massively misrepresenting actual results.

We randomly picked as a case study the Apollo Investment Fund VI L.P., which CalPERS has committed $650 million to, actually invested $508 million into, withdrawn $10.9 million from and present the residual value (including the withdrawn amount) as $450 million, or a -10.7% IRR. Now we don't have reason to believe that CalPERS is fudging this number: after all it is reporting merely what Apollo is telling it.

So the next question is, is this -10.7% IRR indicative of the investments in Apollo VI?

The names that constitute the $10.2 billion in committed capital Apollo VI are:

Realogy (NYSE:H) (on verge of bankruptcy)

Harrah's (HET) (on verge of bankruptcy)

Claire's (CLE) (on verge of bankruptcy)

The debacle that was the Huntsman LBO

Rexnord (NYSE:RXN)

Berry Plastics (BRY)

Verso (bankrupt)

Jacuzzi Brands (JJZ)


We highly doubt -10.7% is anything even remotely close to where CalPERS should consider its residual equity value in Apollo VI. And by fair estimates, this is merely the tip of the iceberg.

Nonetheless, presenting public data that shows that the public pensions manager is disclosing over $14 billion in profits when it is hiding potentially much more than that in losses could be interpreted as borderline illegal. The question is, is this a responsibility of Apollo (to show the true sad state of affairs), or of CalPERS (to actually check these numbers and not to pull a Fairfield Greenwich "sorry, we had no clue what was really going on until it was too late").

Regardless, as CalPERS itself points out, the numbers were as of September 30. It is a fact, that the December 31 numbers are due any minute and we are salivating at the prospect of feasting our eyes on these numbers, to see just how disconnected from reality the column known as IRR as presented by CalPERS has become.

And just as Apollo VI is merely the tip of the asset manager iceberg, so is CalPERS merely a blip in the Alternative Investment Management universe of all public pension managers. Combined together, and based on realistic performance, these two will result in an explosive deterioration in both fund IRRs and public pensioners' patience and empathy, once they realize their money has been mismanaged into oblivion.