A Xenophobic Threat to CalPERS and Private Equity

| About: The Blackstone (BX)

Xenophobic: One unduly fearful of what is foreign and especially of people of foreign origin.

There was much hand wringing and scowling in Congress when sovereign wealth funds descended upon struggling U.S. financial firms with cash to mend tattered balance sheets. Many congressman made arguments reminiscent of arguments made against Japanese investments in U.S. real estate in the 1980s. Some of these arguments even referenced the U.S. trade deficit with China and decried the purchase of U.S. assets, specifically U.S. government securities, by the Chinese. While these arguments by Congressmen display a profound ignorance of basic economics and the incentives which face the Chinese and other foreign investors in U.S. assets including U.S. government debt, they all have an underlying xenophobic tone and/or expression of suspicious thought. The Prince could go on for days thanking foreign investors for bailing out U.S. financial firms, for subsidizing the insane borrowing of the U.S. consumer and government, and for artificially keeping the dollar stronger than it should be. Wouldn't it be an amazing sight to see a Congressman offering such thanks and praise to the other countries on which the U.S. relies? Yet, we will never see this happen, because the truth is, according to The Prince, not popular and this post will probably also not be widely popular. In fact this post may make many people uncomfortable. The disdain and complaints about foreign investment in the U.S. is not limited to the federal government and certainly reaches down into state governments, as my following example will illustrate.

There is one recent story, brought to The Prince’s attention by The Deal’s Dealscape blog, which really makes the Prince question the wisdom and intentions of lawmakers in this country when it comes to dealing with the financial industry. Basically, there is a bill in the California legislature right now that could effectively pull the two largest U.S. pension funds, the California Public Employees’ Retirement System [CalPERS] and the California State Teachers’ Retirement System [CalSTRS], out of their private equity investments. The bill is called Responsible Private Equity Investment Act of 2008 bill (AB 1967) and it restricts the two big state pension funds from investing in private equity funds that have sold stakes to sovereign wealth funds. The bill establishes a group of tests that most private equity funds would fail. For example, the fund’s country must be a signatory of five of the United Nation’s six human rights treaties. CalSTRS has already said that if the bill passes, it would have to cease investing in private equity, which is its best performing asset class. CalPERS has been quiet on the bill. Not surprisingly, the bill is co-sponsored by Service Employees Union International [SEUI], a union that is a huge critic of PE (witness the attack on Rubenstein at the Wharton conference).

This bill has huge implications if passed. We are talking about the top tier firms being excluded, because they have sold stakes to foreign investors. Firms like Apollo, Blackstone (NYSE:BX), and Carlyle would be sidelined. So will the bill pass? AB 1967 has only one sponsor in the legislature, Democrat Alberto Torrico. He is a former assistant majority whip, meaning he knows the ropes in the legislature. The Prince is not interested in handicapping the chances that the bill passes, because just the fact it has been proposed raises serious ethical issues. Not to mention that fact that, like the drive for Socially Responsible Investing, this bill would probably lower returns at both pension funds and thus harm all the pensioners within those funds. What are we really afraid of when it comes to foreign investors? Why do legislators not talk about the secret dirty reasons that make them uncomfortable about foreign investments. These reasons are all too poorly hidden by such legislators’ rhetoric and actions.

Many of The Prince’s readers may have no problem with foreign investments, but whenever our representatives decry foreign investments in the U.S., they hide behind arguments like SRI, the human rights record of the company, national security concerns, etc. Maybe they should take a good hard look at what intuitively makes us uncomfortable about foreign investments in the U.S. They may realize that our real motives for protectionist actions and angry rhetoric is nothing more than racism. They may find out that they don’t like what they see or believe. Maybe the lawmakers who pass laws like the one being considered in California are nothing more than a dressed up 21st Century group of nativists when it comes to dealing with foreign investors. The Prince leaves it to his loyal subjects to decide.