Teacher Trustee Questions Callan’s Defense of Private Equity at CTPF Board of Trustees Meeting

Teacher Trustee Erika Meza is questioning PE.

The battle over private equity played out front and center at the Chicago Teachers’ Pension Fund Board of Trustees Meeting December 11, 20205.

In one corner was CTPF Consultant Callan and Angel Haddad who are paid to find private equity companies and in the other corner was newly elected Teacher Trustee Erika Meza, who was elected on a platform to take on private equity and its exorbitant fees and secret deals.

Callan Consultant Angel Haddad made his investment presentation at the Chicago Teachers’ Pension Board meeting outlining the various asset classes and how decisions are made. “Our role is to make informed good investment decisions,” he said. “We had 10 or 12 years of low interest rates. We reduced risk and further diversified the portfolio.” He added that they will focus on a Chicago investment strategy which will highlight affordable housing, underserved schools, healthcare centers and other areas on the West and South Side of the city.

Diversification was the key word Haddad and his partner, who said he was previously a hedge fund manager (CTPF stopped investing in hedge funds), used to defend the investments in private equity companies.

“Most business in America is private equity, so if you don’t invest in PE then you’re missing a swath of a different return source,” Callan said.

They didn’t mention that private equity investments result in far more bankruptcies that result in loading up companies with debt and cut jobs, pensions, healthcare and other vital community assets.

“Private equity offers different return sources that are outside of equities, you can invest in small businesses on the Southside, that may bend steel, they may be held by a PE firm. You can’t get that in the public markets,” Callan said.

Callan Consultant Yosangel Haddad

Callan repeated throughout their presentation that private equity (PE) offers ‘diversification’ from your public equity market, which is the biggest risk in your portfolio. Public equity offers growth, but it doesn’t offer much diversification because that is the biggest risk. Public equity is the growth driver along with private equity for payments 10 years or 15 years out. “You don’t want to rely on PE in the short term,” Callan said. “If you had to rely on public or private equity for your benefits payments, then the government would have to step in.”

“What I’m learning about PE is contradictory to what I’m hearing today,” Teacher Trustee Erika Meza said. “I’ve read multiple peer review studies about private equity and public pensions. Our Fund currently has about 71 money managers, Boeing at about $50 billion Pension has less than 40 managers and they even want to reduce it. 71 public money managers is a lot. We have been having an RFP once a month for more money managers. That’s unheard of.”

Meza then landed a hard jab at Callan by exposing the role it is playing for CTPF to find more PE firms to invest in. “For each PE search that Callan does for us per contract, we’re paying them $25,000, almost the cost of our trip to Hawaii for the 3 day trip.”

The Callan Consultant Haddad tried to counter the hard hit, but couldn’t and was gasping for air when Meza was ready to land another punch.

“There is just mounting, mounting evidence that private equity is not performing, outperforming a regular index fund, whole market index fund,” Meza said. “So what I’d like to ask Callan is we need to learn about the opportunity cost. If we were to compare what we have in PE even if it’s less than 9 percent of our fund, if you could compare over 10 and 20 years $100 million of your private equity strategy and simple fund portfolio stocks and whole market index funds, US stocks, global stocks, and a bond index fund for fixed income. Those are already diversified, they’re broad based, broad exposure to the market, very liquid, and compare those two strategies, including all the fees to PE managers and funds, everything carried interest, transaction fee, everything and also include projected distributions, realistic return assumptions. I would like to see that at the next meeting.”

Callan, on the ropes, then meekly replied, “Should we do it market weight?”

“Yes, a 100 percent market weight. I’m referring to the Russel 3000.”

But Trustee Meza wasn’t finished hitting Callan as it staggered against the ropes. “Because we really have to think of the opportunity costs as a fiduciary listening to you all and everything I’ve read about private equity and everything that I’m learning. It is contradictory to what I’m listening to you all. But as a fiduciary we are here to make money in the most efficient way possible.”

Meza further questioned Callan’s numbers noting that their projections showed PE has double the risk of US equity, from 18 percent risk of US equity to 30 percent risk for private equity, yet is only returning maybe 1 percent more.

“So we’re doing double the risk with our Fund with expecting only 1 percent more,” Meza said. “And when I’m reading that private equity is pretty much depleting public pensions I’m saying I’m reading credible sources, such as Harvard Law, such as the Center for Retirement Research at Boston College and even our AFT President Randi (Weingarten) is saying pensions get out of private equity. And then if later we want to talk about affordable housing that’s another story because research is showing that private equity has totally increased rents (and) has been mismanaging property maintenance and things like that.”

But Callan was not down for the count. In fact, they jumped right back up before the bell rang and landed a zinger at Meza in defense of private equity.

“You mentioned PE has twice the risk,” Callan said. “I was talking about diversification from your primary risk so the primary risk in your portfolio is global equity markets (Callan did not sign off on the recent two $10 million investments in Africa PE). I’m not saying it’s lower risk, but it’s diversifying your risk. Your primary risk is global equity. Which it is in every portfolio. And that’s a very good question. We want to grow the portfolio and a good way is growth equity. So what you want to have is that diversification so you do have other assets you can look to during a crisis. We want to take risks. You cannot get returns without risk. The goal is to put different risks together in a thoughtful fashion.”

“Implementation is the most important thing,” Callan Consultant Angel Haddad further said. “We can look at PE theoretically like you did on pg 15, but at the end of the day if you hire the wrong manager, and I’ve seen it. I’ve seen PE managers blow up. Where you get a letter don’t call me, call the lawyer. We don’t want that. That’s why you guys have a pretty strong PE team to make sure that the strongest candidates with evidence of outperformance.” (What about investing in Ariel that has been on the Watchlist for years?)

Callan then swung and missed when they tried to counter Meza’s statement that Callan is getting paid to find more PE firms. “We are not your private equity search consultant,” Haddad said. “We put together performance reports, we do not get paid $25k for every search, that’s in the retainer. We only charge $25k for private equity searches, but wait, I’m sorry, I think I misunderstood what you said.”

Trustee Meza, whose grasp of financial statements and spreadsheets helped get her elected against the CTU CORE caucus candidate, was not about to back down to Callan.

“One other major concern with private equity besides its inability to prove outperformance, after a 3, 10, 20 year timeframe, is the opaque fees. So I would like to ask Callan in the search for another PE if there is one, if they ask them to fill out the template ELPA, the pension plan organization. That they really truly give us their fees to the trustees. We need to see every single fee. And we need to really hold them accountable to a benchmark that we understand, not that they create.”

Callan then punched back hard, real hard in defense of their beloved PE.

“I’ve been doing this for 26 years and one of the most confusing things is understanding whether PE is adding value,” Callans Haddad said. “Total fund number doesn’t give you the total picture. PE reports one number I like - every dollar invested what did you get back? Every dollar, the Fund received $1.60 back in PE net of fees (which includes all expenses such as fees).”

“How do we value (the) success of private equity? Are we paying too much for that? Those are great questions. If you choose the right managers you create value for the Fund,” Callan said.

The Callan consultant then admitted everything about PE was confusing and complicated, and said they do have to evaluate this constantly. Investing 101 says if something is too confusing or complicated, you steer far clear from it. A public pension fund should not be investing in secret deals with a notorious industry known for destroying companies and communities and charging sky high fees that are not disclosed completely.

Meza asked to compare the CTPF returns over the last 10 years of between 6 and 7 percent to a simple Index Fund. “I would like to know which avenue is going to make the teachers more money, net of fees. There are Index Funds (that are) a fraction of the fees. I want to know how much more teachers would have made in private real estate.”

Like a Russell 3000? Yes, Meza said.

Trustee Teacher Quentin Washington, who always defends CTPF decisions, said to once again keep in mind the diversification piece. “So while fees make sense in theory in private equity or private credit, it’s diversification that we’re paying for. If we only look at (the) Index, then when (the) Index goes left, what protects us, like in 2008?”

Trustee Meza then quickly countered Washington’s defense of Callan and PE. “I agree with diversification, but there is nothing more diversified than the stock market with over 4,000 companies, where some may fall, others go up.”

Callan waved the white flag on making the comparisons with an index fund and admitted that over the long term there is no question that the equity market is going to yield a higher return.”I get your point, let’s look at highest return for members, but let’s look at risk adjusted rate.”

Callan’s Haddad then gave a little history lesson on what led public pension funds to invest in private equity. He said public pension funds were 100 or 85 percent funded in the early 1990s, but the market tanked after the dot com bubble burst, so the Feds lowered interest rates. What he didn’t say is that is exactly how private equity was able to buy up many companies like Toys ‘R Us and gut them and lay off tens of thousands of workers while selling off the assets. But now private equity is not only destroying companies and communities but draining public pension funds across the country.

“This dialogue will help generate better decisions,” Haddad said.

Stay tuned ..