Economic Warrior's Blog

“Anybody who plays the stock market not as an insider is like a man buying cows in the moonlight.”  Daniel Drew, 19th century speculator

“But private-equity players are quintessential Wall Streeters whose grasp of the concept of reasonable limits is quite limited. For them, the whole purpose of doing business is to make money, so if a strategy works, each success is just an encouragement to raise the ante and be a bit more daring next time.”  Josh Kosman, “The Buyout of America, How Private Equity Will Cause the Next Great Credit Crisis”, 2009

If you want to really understand how Wall Street and their private equity offspring totally exploit the tax code, the companies they purchase and the massively underfunded state pension funds, then you have to look at the giant California pension fund known as CalPERs. CalPERs funds the pension benefits for about 1.6 million workers, making it one of the largest in the U.S.

 State pension funds are in the final analysis, the pot of gold for Wall Street suppliers such as big time broker dealers, hedge funds and masters of the universe private equity firms. Private equity firms or leveraged buyout shops are investment partnerships that use massive amounts of debt to purchase companies and real estate investments. In the process, they collect hefty management fees of 2%  and when they sell or recapitalize the firms, the private equity titans swipe 20% off the top profits for themselves  from managing other peoples money–and get to take their take in at capital gains rates!!

Investment firms covet  state pension funds because that is where the money is, and generally they get to hold on to this money for long periods of time. CalPERs, the pension fund with over $200 billion in assets, has  14% of its assets invested in alternative investments, and roughly half of that is invested in private equity. What is a looming problem that CalPERs, with roughly $23 billion or so in alternative investments as also on the hook for another committed or non invested amount of $23 billion liability–a monstrous cash call if there ever was one. Its sister the California State Teachers Retirement System or CalSTRS, has about $8.2 billion in alterative investments, with a committed not invested liability of about $19.8 billion. The New York State Pension fund, another big pension fund, has about $10.3 billion in alternative investments, with a committed not invested liability of $12.6 billion.

The relationship between private equity firms, state pension funds and the nation’s big center money banks is a dysfunctional showcase of greed on the one hand, and hubris on the other. Pension funds like the troubled CalPERs have only made an investment return of  3.25% over ten years by 2009.  and it is a tad less for New York State.  Private equity firms acting as general partners put the deals together, limited partners such as state pension funds and college endowments put up the real money, and the banks put up all the bank financing and bond deals to fund the deal.  The target company or the real estate properties acquired insiders make a killing.  The private equity firms make money even if the company goes bankrupt. The state pension and college endowments may make money, or lose billions. Employees of target companies lose benefits and jobs, and are saddled with monstrous amounts of new debt. Classically, before a company is approached by a private equity firm, the target company–as the private equity likes to call them, has 80% in equity and 20% in debt. After the private equity firm purchases the company, the company ends up with 80% debt and 20% equity.

 If you think problems are bad with subprime mortgages are bad, wait until the private equity loans start coming due in a couple of years. There were roughly 100 private equity deals to go bankrupt in 2009 as companies struggled with monstrous debts.

And now CalPERs, the California pension giant is coming into the spotlight, as it should. For the record, CaLPERs, the pot of the gold for Wall Street at the end of the rainbow, not only invests billions in private-pirate equity deals, it also has ownership stakes in Apollo Management Group, The Carlyle Group, Silver Lake Partners and Yucaipa–the firm owned by billionaire Ronald Burkle , the firm where former President Bill Clinton went to work after the presidency to make a $100 million or so. But CalPERs investment of $600 million in Apollo in July 2007 has been a dud for a 9% interest in the firm, the value in Apollo has dropped about 66%.

At issue is the recent suit brought by California’s attorney general Jerry Brown’s office about placement agents–middlemen–used to secure business from the lucrative CalPERs pension fund.  It appears Arvco Capital Research LLC, which employed former CalPERs chief executive Fred Buenrosto and Alfred Villalobos, a former CalPERs board member, for its role in allegedly bribing or trying to bribe CalPERs officials to purchase a stake in the Apollo Global Management–which it did.

Arvco obtained more than $47 million in fees from money managers  in dealing with CalPERs between 2005 and 2009, the attorney general suit maintains. The suit also maintains that when CalPERs was contemplating a purchase in Apollo, Arvco’s Villalobos rented a private jet and flew Senior Investment Officer Leon Shanian to New York City to attend a fund-raiser honoring Leon Black, founder of the Apollo Group at the Museum of Modern Art in May 2007, as CalPERs did fork over $700 in July.

A Superior court judge in Los Angeles on May 5 ordered Mr Villalobos bank account and other assets frozen. Jerry Brown’s office said assets included two Bentleys, two BMWs, a Hummer, art work and 14 pieces of property. A good case to watch…a black eye for CaLPERS and private equity…

This entry was posted on May 8, 2010 at 7:55 pm and is filed under Uncategorized . You can follow any responses to this entry through the RSS 2.0 feed You can leave a response, or trackback from your own site.