California’s $459 billion state pension fund is throwing its weight behind a bill that it says would help it compete as a lender in the market for private debt, where borrowers prize secrecy.
The California Public Employees’ Retirement System is supporting a measure in the state Legislature that would exempt information about potential borrowers from public disclosure. Calpers says the change would boost returns and save money by allowing it to engage more directly in the growing market for non-bank lending. But the effort faces opposition from a retiree group, which says it would add risk to the portfolio and could introduce conflicts of interest at a fund that has suffered high-profile governance failures.
Assembly Bill 386 would create a new exemption under the state’s public records law. It specifically addresses Calpers, and would let the pension keep certain things secret: due-diligence information relating to private loans; the loan agreements themselves; the identity of the borrower’s ultimate owners; the borrower’s financial information; information about collateral pledged against private loans and meeting materials of the creditors’ committees.
For Calpers, direct participation would bring access to potential higher-yielding, albeit riskier, private-lending business without the cost of third-party money managers. The pension currently has $454.2 million invested in private debt through six firms, which underwrite and service the loans for a fee.
“AB 386 enables Calpers to bring private debt investments in-house and save significantly on the high fees now being paid to outside money managers,” Megan White, a spokeswoman for the pension, said via email. “This bill is an important part of our strategy to achieve our 7% investment return target, pay pension benefits and deliver retirement security to our members.”
Calpers missed that benchmark in fiscal 2020, returning 4.7%, according to a financial report. It’s hardly alone — pensions nationwide are dealing with the same dilemma. With bond yields still historically low, retirement funds are moving into riskier, potentially higher-returning asset classes and away from traditional holdings of stocks and debt to meet return targets and cover benefit payments. New Jersey’s pension said in February that it’s eyeing further investment in private equity and credit to boost performance.
The Retired Public Employees’ Association of California, a group representing more than 24,000 Calpers members, argues the bill shields the nation’s largest public pension fund from necessary scrutiny given its recent history of ethical lapses. They say that Calpers, which has been operating without a permanent investment chief since August, could still participate in this market with three of the six exemptions.
“I could fully understand why a borrower wants to keep their books closed to the public — they’re a private entity,” said David Soares, a committee chair for the retiree group. “Once that loan is made, it becomes an asset held in public trust and the public needs to know who they’re lending to, what the terms of the loan are and what collateral secures the loan.”
Pensions poured into the private debt market in the aftermath of the 2008 financial crisis, chasing yield as interest rates plummeted. This has pushed a sector that was virtually non-existent in 2000 to nearly $1 trillion under management, according to data provider Preqin Ltd.
Pension involvement in private debt has more than doubled since 2015
But U.S. pensions rarely do these deals on their own because they require specialized expertise and due-diligence work. Instead, they work through asset managers who can source, underwrite and monitor deals.
“It takes lots of experience and execution capability, and competition for deals is particularly fierce, which is something to watch out for,” said David Lowery, head of research insights at Preqin. “You look at the cost of doing deals in-house versus working with a manager, in this type of market where there’s a lot of dry powder and it’s really competitive, it certainly wouldn’t work for a lot of limited partners.”
A similar bill was introduced last year and withdrawn. Assembly Member Jim Cooper, a Democrat who chairs the public employment and retirement committee, authored both measures. While the previous version also included the California State Teachers’ Retirement System, that fund isn’t a party to the current bill, and a spokesperson declined to comment.
Calpers has been facing increased scrutiny. It has gone through nine chief investment officers in two decades. Ben Meng, the last investment chief, resigned in August, after a little over a year at the helm, over an ethical breach — he approved a Calpers investment into a Blackstone Group Inc. private-equity fund while holding shares in the company personally. The pension has yet to hire his replacement.
Chief Executive Officer Marcie Frost faced questions over disclosures relating to her educational background in 2018. Before that, former CEO Federico Buenrostro served time in prison for steering $14 million in placement fees to a former board member in exchange for gifts and cash bribes. That former board member, Alfred Villalobos, committed suicide ahead of his corruption trial in 2015.
Assemblyman Cooper acknowledged the pension’s past struggles but said the potential benefit for the beneficiaries outweighs the privacy concerns. He said he hopes the bill will make its way to the body’s floor this month. If passed, it will move to the state Senate for a vote.