Feeling the heat from our reporting on the horrific practices of private equity companies and in the wake of two books published this past year with the word ‘Plunder’ in each title, the Chicago Teachers Pension Fund held its Investment Committee First Friday meeting on February 2, 2024 to talk about private equity.
“I think there’s a lot of misconceptions born out of the early days of buyout funds that continue to circulate today,” CTPF Chief Investment Officer Fernando Vinzons said. “But it’s a critical component of our asset allocation.”
Vinzons said at the private equity education session that PE investments have returned cash of almost $170 million annually which equates to two months of benefits payments. He threw cold water on the Nevada Employment Retirement System that is going to 100 percent passive investing (which means saving tens of millions of dollars in managers’ fees) because Nevada has allocated 6 percent of its money to private equity which has grown to $5 billion.
The CTPF Consultant Callan Rep told Trustees that Private Equity makes up about 8.5 percent of the total portfolio or $2.3 billion, and that for every dollar the fund invests, it gets $1.61 in return. She said you are locking up money because PE usually requires a five year commitment, but the fund is getting paid for it. She said the Fund’s goal is to bring PE investment down to 5 percent in the next few years.
“Where do we as a fund (know) how they’re doing on the right to organize, neutrality, workers’ voice, labor practices and discrimination,” asked Teacher Trustee Paula Barrajas who won her election last November. “I don’t see any of that in here. How do we get that? As a labor union we need to have this as we go forward.”
CIO Vinzons said they can ask the private equity firms for this information.
Private equity is notorious for gutting companies, laying off workers, cutting health and pension plans, investing in fossil fuels that are destroying our planet and killing people via cost cutting. Studies show there were 10 percent more deaths in private equity-owned nursing homes.
But Retired Teacher Trustee Mary Sharon Reilly, who was told she could not ask questions during the presentations because she attended virtually, was still able to sneak in a comment that CTPF President Jeffery Blackwell read out loud, stating that the they are fiduciaries who just need to make sure the fund performs.
This statement was ludicrous because the fund makes decisions all the time that reflect political and social concerns, such as divesting from the oil and gas sector, investing with minority managers and continuing to invest in Ariel, a firm connected to the Chicago Machine that keeps losing money for the Teachers Pension Fund.
The first private equity firm to make a presentation was Adams Street who have invested almost $800 million in pension money over the past 30 years. The employee owned firm began in 1972. They said private equity provides more long-term growth versus the public markets which is more short-term based on quarterly results. Private equity serves either as venture capital to grow companies and thus add jobs or buyout where they acquire older companies that might be ‘overleveraged.’ That translates into cutting jobs, like when private equity bought Toys R Us and eliminated over 20,000 jobs.
The Adams partner said PE firms typically take 20 percent of the profits. Why Private Equity? PE returns exceed public markets to compensate for the illiquid nature (the money is stuck for five years), they can find attractive investments in a tough market and their investment is the driver of innovation and growth. He cited tech titans Apple, Amazon and Facebook that all received venture capital in the beginning. PE companies return 520 basis points over the public markets and a graph showed that private equity returned 13.5 percent vs. public markets return of 8.75 percent over 20 years.
Trustee Barrajas said 50 percent of private equity backed companies go bankrupt. How many of their companies went bankrupt, she asked. Adams responded that they did not have those numbers, but that their focus is on growing companies and that bankruptcies appear in overleveraged companies (the rep conveniently did not say that PE is responsible for adding on significant debt to companies they buy so they can extract huge fees).
The Adams rep added that private companies have increased substantially over the last several years which allows the companies they acquire more time to grow before going public. He said buyouts make up 75 percent of the private equity market, while venture capital makes up 25 percent. So far fewer private equity firms add rather than cut jobs. “We invest in small companies and get more consistent returns and more upside because they have the ability to grow.”
“I don’t want you to feel this is an interrogation of Adams Street,” stated CTPF Investment Committee Chair Jacquelyne Price Ward. “We want to get a better understanding, that’s why we’re asking questions. This is a very good education session for us. We have asked for this so we can get a better and deeper understanding of private equity.”
Adams and the others stressed that they hire many minority employees. Adams said half of the people they hired are a minority. (Except it was funny to hear these statistics coming out of the mouths of three reps who were as white as wonder bread) “This was not the case 15 yrs ago, now we embrace more diversity.”
Teacher Trustee Victor Ochoa said there is the “Hollywood version” of PE, which I presume he meant focuses on the doom and gloom. “Saving companies or helping innovate (is) not much focused on.” He wanted Adams to further defend private equity by stating it is not their fault that they have to eliminate many jobs. They are merely reacting to the market.
The Adams rep said that was a very good question - we would call that a softball question - and repeated his earlier presentation about how great private equity really is.
“I’m not gonna argue private equity is perfect,” he said. “You eliminate jobs before bankruptcy. The Hollywood story no question is those bad stories win out. No question the private equity industry got a bad rap going back to the late 80s. We’ve probably all read the book Barbarians at the Gate, the rise of KKR and RJR Nabisco. That was done at a time when leverage for the industry was at very very high levels. Equity was being squeezed so there was very little room for these companies to operate in the capital structure. What we have seen in the future (is that) the private equity role has expanded dramatically, where we invest and the industry has grown over the last few years.”
The next private equity presenter was Lateral Investment Management. Their director Richard De Silva said he was a former Washington Post reporter who started IronPlanet, an eBay version of bidding on construction equipment. He kept giggling throughout his speech as he said they focus on growing companies and hiring minority people, although he admitted the picture of their operating partners who were all older white men was - giggle, snort, giggle - not so diverse. “This reflects corporate America,” he said, still laughing. “You can see the contrast. We have a senior guy from Blackstone.”
The name Blackstone is synonymous to Jack the Ripper of finance. Blackstone is one of the biggest private equity firms that is notorious for loading up companies with debt and then charging enormous fees and gutting everything from workers pensions and health plans to defrauding the government before bankrupting the companies they acquire. They continue to operate because their management team is a revolving door of federal government employees who - now we can laugh - are supposed to regulate the industry.
When Trustee Barrajas noted this, De Silva in a serious tone stated they are not affiliated with Blackstone, it was just a former place of employment of one of their managers. But he had to mention the Blackstone name, because they are the poster child of private equity!
Lateral pointed to a success story of one company they acquired which grew from $40 million in revenue to $200 million, and from 300 employees to 1,200 employees. “We transform the businesses!”
“This is a niche market,” Trustee Price Ward said. “It seems very clean. I like the term growth rather than paring down. Thank you for expressing that very clearly. And I love your diversity program!”
The next private equity firm to present was McNally Capital who invest in family-owned businesses. Many family businesses they invest in have children who do not want to run the family business and they are looking to cash out. “We view it as a merger and a marriage.”
McNally said they put 15 percent of their own money into businesses they acquire, which is five times greater than the industry average, to get at least a 20 percent ownership stake. They mentioned investing in the aerospace and defense sector - which makes you wonder if teachers’ retirement money is going to make bombs the US is shipping to fuel wars being waged around the world. CORE Trustees stated in earlier election materials that they divested from investing in gun manufacturers!
McNally stated they have invested in five companies that returned over six times their original investment and their returns are in the top 10 percent of private equity buyouts. They too value diversity with a workforce that is 40 percent minority. They also touted their ties to Chicago and that they are involved in local philanthropy.
Teacher Trustee Tammie Vinson then asked if they were helping out Chicago public schools, and McNally said no, they were helping the private Catholic School Christo Rey network. Would you be interested in helping a Chicago public school? “Oh yes! We would love that!!”
Trustee Barrajas asked if their workers were unionized, and they said yes. The presenters earlier had said that usually PE firms don’t like to invest in unionized companies (probably because it would be tougher to cut their wages and benefits when there is union protection).
The last presentation was made by Gen NX360 who repeated that they too are growing companies, they are one of the best in private equity, and they are minority-owned. They look to acquire many mom and pop companies, including one that makes ‘wholesome and nutritious’ meals for schools. Trustee Price Ward encouraged them to look into servicing CPS after the Board axed its contract with Aramark.
Teacher Trustee Quentin Washington, who was surprisingly quiet throughout the question and answer periods, asked about consolidation and redundancy (layoffs!), words they used in their presentation. The private equity head stated once again that they do not fire workers but rather hire workers because they are growing the business. “If we have two or three facilities, certain jobs might be eliminated,” the rep replied. “We generally only own the business for four or five years so we usually need more bodies, not less to grow.”
Trustee Ochoa said their diverse leadership is so wonderful, but wondered if there are not many companies who will try to ‘poach’ their diverse leaders? “I would say our people get calls. We treat our people well. Diversity is important to us, it’s not important to everyone. The performance of the company reflects diversity of thought.”
“It’s refreshing to hear this,” Trustee Ochoa said.
“I wish we could transfer this into the Chicago Public Schools,” Trustee Price Ward said. “We are in sore need of this kind of attitude.”
While CTPF exceeds the number of minority investment managers they work with, having too many managers makes it hard to keep track of who is doing well and who is having problems, Callan said.
“Even with the shrinking number, we’re getting more for our money these days even though we’re employing less,” CIO Vinzons said. “It’s a tough environment now for fundraising. That’s why we stay with the managers we have.”
Trustee Ochoa asked at the end of a three and a half hours private equity presentation if the faces that the private equity firms displayed on the screen was standard practice or just marketing. He said they shouldn’t decide what they want to tell the Board. “Where’s the other stuff?”
Tina Padilla of the Pension Advocacy Group (PAG) asked a more specific question along those lines to the Board of Trustees when the notorious KKR private equity group presented a video of smiling faces of employees sharing in the rewards of the company they invested in. She said KKR failed to mention why these employees do not receive a defined benefit pension and wanted to know why.
CIO Vinzons said the trustees can ask questions that they will ask their managers. But the bottom line he said is how well do they deliver on returns. Is it profitable?
Interestingly enough, not one trustee asked about the excessive fees private equity charge.
“Private equity fees are outrageously high, that is why their fees are never discussed,” said Ted Siedle, a former SEC lawyer who has conducted many investigations of public pension funds.
Siedle wrote the book Who Stole My Pension that showed public pension funds that invest with private equity over the long run end up performing lower because of the high and mostly hidden fees. Former NY Times reporter Gretchen Morgenson wrote a recently published book about the abuses of the private equity industry called These Are the Plunderers that we reviewed. In it she cited a Harvard and Stanford study of $500 billion of investments by 200 public pension funds between 1990 and 2018 that showed the fees in investments depleted the pensions’ returns by $45 billion, or almost 10 percent of the dollar amount. She asked why would any public pension fund want to throw money away at a Wall Street scam that hurts union workers and pensioners.
“It’s preposterous to say you are educating the people when you only present the defenders of private equity,” Siedle said by phone. “Why don’t you also invite the critics like Gretchen Morgenson to explain the pitfalls of this industry?”
One of private equity’s disgusting characters is KKR, who was mentioned earlier as one of the villains of the 1980s. CTPF invests with this buyout firm that tears companies down, fires workers, cuts their pensions and loads them up with debt resulting in many bankruptcies. Why were they not invited to the party?
Siedle said the only thing you can do to defend the teachers pension fund is to control the costs. That’s what astute investors do, and the trustees should do likewise.
The Chicago Teachers Pension Fund is only 47 percent funded and groups like the Civic Federation are demanding eliminating people’s pensions.