Saturday, March 28, 2009


Two years ago it was said that you if had a direct line to the CIO of CalPERS, one of the nation's largest public pension funds, and specifically to its Alternative Investment Management group, you had it made. None of that Goldman Sachs partners being masters of the universe garbage - this was the real deal. Say you needed $100 million for fund XYZ - you simply dialed that one number in Sacramento, and if you made it past the secretary, you were golden. Of course, this worked best if your name started with Leon and ended with Black, but other managers were also sitting pretty. The reason for this is that unlike the public pension funds of New York State for example, where the bulk of the investments were in the public markets via an internal asset manager (who was pretty horrible at his job judging by the fund IRR), and only occasionally did NY invest in external private and public fund managers (which more often than not included a variety of kickbacks, bribes, and other illegal schemes as recently reported by NY's own Andrew Cuomo), CalPERS has the bulk of its assets invested in 3rd parties. While Thomson Banker gives the total amount of CalPERS public investments at $38 billion, an obscure site within the CalPERS website labyrinth presents the amount allocated and invested in various 3rd parties. And the amount is staggering: it seems that a vast number, maybe even a majority of U.S. private equity firms, owe their existence to CalPERS.

Here are the facts (as of September 30, 2008):

Number of unique investments: 290
Total Capital committed: $53.2 billion
Cash Invested: $30.8 billion
Cash Distributed: $17.4 billion
Cash Distributed Including "Residual" Value: $38.8 billion

It is that last number which we will focus on shortly...

But some more data first.

CalPERS had $173.6 billion in total assets at March 26, which represents a loss of 26.6% after costs between July 1, 2008 and January 31, 2009. The full January 31 CalPERS asset summary can be found here. Additionally, CalPERS seems to be suffering from the book-to-market marking syphilis that is pervasive throughout Wall Street: book value of CalPERS' assets was $194.9 billion at January 31, a non-trivial $21.3 billion overestimation of its market value. We would venture to guess which of these two numbers is used for pension actuarial purposes, but the answer is likely quite obvious. Interestingly, in the same report, the value of AIM investments had a $27.4 billion book value, and an even worse $23.9 billion market value. While I am not sure how this number compares to the $38.8 listed above as total investments plus cash outs, or the $21.4 billion of net (38.8-17.4) AIM value at September 30. However, if the superficial conclusion is that the market value of private equity investments between September 30 and January 31 increased by $2.5 billion, then we may have some very serious credibility issues on our hands.

Here is what CalPERS says about its Alternative Investment Management program:
Since inception in 1990 to September 30, 2008, the Alternative Investment Management (AIM) Program has generated $14.2 billion in profits for CalPERS. Given the young, weighted-average age of the portfolio (3.2 years) this amount will continue to grow as the portfolio matures.
CalPERS may need to adjust this mission statement once the December 31 number are out.

But continuing with the facts. Here are the asset managers that have benefited the most from CalPERS generosity, based on both total capital committed and actual cash invested (this is not an exhaustive list of CalPERS investments).

Apollo: $4.1 billion, $2.7 billion
Aurora: $650 million, $267 million
Avenue: $1.4 billion, $780 million
Blackstone: $1.4 billion, $1.2 billion
Candover: $643 million, $480 million
Carlyle: $4 billion, $2.1 billion
CVC: $2.3 billion, $1.3 billion
First Reserve Fund: $1.1 billion, $685 million
Leonard Green: $850 million, $455 million
Hellman & Friedman: $1.0 billion, $762 million
KKR: $1.6 billion, $880 million
Levine Leichtman: $450 million, $389 million
Lexington Capital: $400 million, $392 million
Madison Dearborn: $710 million, $634 million
MHR: $400 million, $218 million
New Mountain: $550 million, $165 million
Oak Hill: $375 million, $151 million
Pacific Corporate Group: $1.9 billion, $800 million
Permira: $573 million, $388 million
Providence: $525 million, $297 million
Silver Lake: $1.1 billion, $450 million
Tommy Lee: $640 million, $475 million
Tower Brook: $575 million, $220 million
TPG: $3.2 billion, $1.5 billion
Wayzata: $325 million, $218 million
Welsh Carson: $650 million, $601 million
WLR: $698 million, $405 million
Yucaipa: $764 million, $481 million

And many others... But you get the gist: Apollo, Carlyle, TPG, CVC, Silver Lake, Blackstone, and Avenue pretty much hold the fate of the majority of California's teachers and public workers in their hands... And that future is looking really, really ugly.

We dig in: Among the other data, presented on the CalPERS AIM page is the public IRR disclosed per fund. This is probably the best indication of how some of the more troubled private equity firms are gaming the system, and massively misrepresenting actual results.

We randomly picked as a case study the Apollo Investment Fund VI L.P., which CalPERS has committed $650 million to, actually invested $508 million into, withdrawn $10.9 million from and present the residual value (including the withdrawn amount) as $450 million, or a -10.7% IRR. Now we don't have reason to believe that CalPERS is fudging this number: after all it is reporting merely what Apollo is telling it.

So the next question is, is this -10.7% IRR indicative of the investments in Apollo VI?

The names that constitute the $10.2 billion in committed capital Apollo VI are:
Realogy (on verge of bankruptcy)
Harrah's (on verge of bankruptcy)
Claires (on verge of bankruptcy)
The debacle that was the Huntsman LBO
Berry Plastics
Verso (bankrupt)
Jacuzzi brands

We highly doubt -10.7% is anything even remotely close to where CalPERS should consider its residual equity value in Apollo VI. And by fair estimates, this is merely the tip of the iceberg. Nonetheless, presenting public data that shows that the public pensions manager is disclosing over $14 billion in profits when it is hiding potentially much more than that in losses could be interpreted as borderline illegal. The question is, is this a responsibility of Apollo (to show the true sad state of affairs), or of CalPERS (to actually check these numbers and not to pull a Fairfield Greenwich "sorry, we had no clue what was really going on until it was too late").

Regardless, as CalPERS itself points out, the numbers were as of September 30. It is a fact, that the December 31 numbers are due any minutes and we are salivating at the prospect of feasting out eyes on these numbers, to see just how much disconnected from reality the column known as IRR as presented by CalPERS has become. And just as Apollo VI is merely the tip of the asset manager iceberg, so is CalPERS merely a blip in the Alternative Investment Management universe of all public pension managers. Combined together, and based on realistic performance, these two will result in an explosive deterioration in both fund IRRs and public pensioners' patience and empathy, once they realize their money has been mismanaged into oblivion. Sphere: Related Content
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six said...


I do analysis for fund and I went through all of TPGI's investments. They are also on the brink of bankruptcy. If you want to take look at the research, pull a search on seeking alpha on TPGI. Worse REIT on earth.

Unknown said...

"these two will result in an explosive deterioration in both fund IRRs and public pensioners' patience and empathy"

To say nothing of states' budgets and taxpayers' pocket books.

If California isn't bankrupt already, it may well be soon.

Anonymous said...

and no doubt the media will blame this on the HFs

Anonymous said...

Ugh! after reading this article I need a good laugh.

I submit to you the Evil Knievel Index Dow predictor

Anonymous said...

Going to blame the hedgies?

From Dr. Patrick Byrne Deep Capture founder & Overstock CEO

(right click and choose Open in New Window)

Deep Capture

OhmeOhmy said...

And as much as ZH tries to enlighten us with factual data pointing to the impending meltdown that awaits us. It is important to know exactly what happened so in the future we can avoid this if we make it to the other side. The relationship between .gov and Oligarchs must be severed.
Matrix Deja Vu: There is a point in the movie where Neo and his comrades are walking up a staircase. Neo glimpses a black cat that disappears then reappears

Living in a Synthetic Reality by Patrick Byrne

VC said...

ouch...ZH really knows how to skewer the meek.

Anonymous said...

Since Tyler didn't provide any Frontrunnings this morning I will provide this to this collection:

Hedgies song of the year

Anonymous said...

Sunday Frontrunning?

Try this one.

Because of California's Proposition 215, a referendum legalizing medical marijuana paving way to a thriving industry. Recent studies say that Californians legally grow more than 20 million pot plants. Their bounty, valued at as much as $14 billion has generated $100 million in state tax revenue a year.

One way out of backrupcy...

Anonymous said...

All this gloomy news from you. How about some good news? Maybe some stories about hotel chains that are doing really well?

Anonymous said...

I would point out that yes, it is widely regarded that CalPERS is in terrible shape on the PE side of the house... they are rumored to be strongly advocating for fewer capital calls this year. But not all funds are in as bad a shape as your example.

Apollo VI is admittedly in terrible shape (though Verso (this is verso paper, is not bankrupt yet).

THL is also probably amongst the worst, but some of the others may not be as bad. Also there is probably a really long lag in the info you have, since Apollo hasn't reported 12/31 valuations yet. They are sure to be lower than 9/30 valuations.

Just some things to keep in mind.

Sam said...

@3:08 You just repeated, almost verbatim, what he said. What's your point?

Leo Kolivakis said...
This comment has been removed by the author.
Leo Kolivakis said...


Interesting post on CalPERS' alternative investments program. If you go compare it with CalSTRS' alternative investments, you'll see that CalPERS took far too many bets with far too many managers.

CalSTRS focused on writing big tickets to the top-decile managers, which is why their performance in private equity was considerably better over the last ten years.

Of course, now that the alternative investment bubble has burst, everyone long private equity is exposed to the fallout that will wreak havoc on their pension portfolios.


Leo Kolivakis
Pension Pulse

Anonymous said...

San Francisco's Public Employees Plan has made some of the same alternative investments as CALPERS. To deflect questions, San Francisco decided not to make public their board minutes. SF also invested in Carlyle/Riverstone which sent some NY people to jail last week. Who knows how far these corrupt plans have fallen

Unknown said...

Tyler, great piece. Here is a view on public pension asset vs fixed income allocations since 1955. Wall street fleeced these guys big time. Keep up the great work.

fresno dan said...

"Because of California's Proposition 215, a referendum legalizing medical marijuana paving way to a thriving industry. Recent studies say that Californians legally grow more than 20 million pot plants. Their bounty, valued at as much as $14 billion has generated $100 million in state tax revenue a year.

One way out of backrupcy..."

Won't stave off bankruptcy...But on the other hand, you won't care that your bankrupt ;)

Charles Swann said...

I am not nitpicking here but choosing Fund VI and making it indicative of the rest of the Apollo investments is a bit of cherry picking the data to make your point. Funds III, IV and V have IRRs of 10.5, 8.5 and 42.4% So it would be quite reasonable for the alternative investment manager to continue on with Apollo's next offering (these funds are numbered this way in that each fund is offered after the subsequent one. It gives institutional funds an insight into how many successful funds a company has.) While I agree in principle that Apollo VI is doing pretty horrible you have to look at a number of other factors, especially when you are involving IRRs. This is because an IRR does not tell you the length of the investment. I can have a 100% IRR but only held an asset for 6 months then the multiple on the investment is only 1.7 times the money put in. On the other hand I can have an IRR of 100% and a period of 3 years and I have 8 times my investment

In this case you have taken a very immature PE investment only in its third year out of a normal 10+ year investment horizon and castigated it.

Also another mitigating factor is that in the early years when the fund is buying portfolio companies and not selling them the only cash flows are the management fees, which are outflows. Thus, a phenomena known as the j-curve is shown, where cash flows eventually become positive as the portfolio companies are sold off or recapitalized and the fund receives returns higher than the management fees. So it is obvious and a natural fact that the returns should be negative for PE funds from years 1-5.

Here is CALPERS website showing you the explanation of the J-Curve

Let me reiterate, the portfolio companies this fund holds do look to be in terrible shape but the 10.7% return showing is a matter of CALPERS requiring quarterly performance reports when no positive cash flows are being generated. The managers of CALPERS are comfortable with this because they know of the J-Curve.

You may be correct that in the future though this fund may not achieve its objective IRR or even return the Limited Partner's monies, but it has very little to do with the numbers you cite in your post.

Matt Rafat said...

Interesting post. California needs immediate reform:

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