Just as the California Public Employees’ Retirement System appears poised to carry on with its $80 billion leverage plan following the abrupt resignation of its chief investment officer, at least one board member is demanding private equity investment activity pause until what happened is fully accounted for.
“In order to ensure that the strategies and investments directed by the former CIO are not tainted by possible conflicts of interest, any new strategies, policies or investments approved by the board should remain on hold until an investigation is completed and corrective actions are implemented,” board member Margaret Brown told sister title Buyouts via email on Tuesday.
“This is how we prove to the beneficiaries we are upholding our fiduciary duty.”
Former CIO Ben Meng resigned on 5 August.
Just days before, a report from the financial blog Naked Capitalism revealed he owned stocks in several publicly traded private equity firms, including Blackstone, to which the fund committed $1 billion during his tenure. A financial disclosure form on the CalPERS website said his Blackstone holdings were valued between at $10,001 and $100,000. A Bloomberg report valued them at less than $70,000.
A California regulatory body is investigating Meng’s financial disclosures. So far, there has been no public evidence of any wrongdoing on his part.
Brown’s statements come after chief executive officer Marcie Frost told Pensions & Investments last week that the leverage plan was still happening. “CalPERS is very committed to this,” Frost said Thursday. “We have not taken a pause in beginning execution of the strategy.”
CalPERS had no comment on Brown’s statement. It also declined to make any staff available to Buyouts to discuss the strategy’s path, saying only it was “moving forward” with the plan.
“The board and CEO should not simply ignore what has happened and keep pushing forward,” Brown said. “The prudent decision is to pause PE investments until such time the board can be assured that compliance checks are in place.”
Brown, a frequent critic of CalPERS investment policy, has been opposed to the leverage plan ever since Meng introduced it in June, as Buyouts reported, calling it “desperate”.
Demand for oversight
Tuesday’s comments are an escalation from Brown’s previous statements to Buyouts, wherein she had called for some staff-delegated authority to be temporarily reduced.
“Until there’s an investigation and we understand what happened and we clear up oversight by not only the CalPERS staff but the board, I want to see a reduction in the amount of delegated authority,” Brown told Buyouts earlier this month. “I don’t want someone to be able to invest a billion dollars in Oak Hill or Oaktree or Blackstone without telling us.”
According to the fund’s private equity policy, the CIO can commit up to $1 billion to a fund without board approval. In opportunistic strategies, which is where the private debt program operates, the limit is $3 billion for fund investments and co-investments.
Brown, who has been the most vocal board member on this issue, is not the only one to voice concerns.
“I believe the Board has an obligation to CalPERS members to determine whether Mr Meng’s carelessness violated any laws or caused financial and reputational damage to the pension system,” state controller and board member Betty Yee wrote in an 10 August letter to board president Henry Jones. “While the CIO’s resignation was appropriate, the Board’s obligation to CalPERS members does not end there. Rather, it calls for a swift and thorough inquiry into this matter and potential actions needed.”
Yee’s office did not respond to a request for comment on Brown’s statement.
A 17 August closed-session meeting on “personnel matters” had a brief open session roll call, during which Brown argued to allow public comment and Yee tried to get Jones to commit to some sort of a public hearing on the circumstances around Meng’s departure. Both were rebuffed.
Afterwards, Frost issued a statement saying staff was committed to compliance and would bring “specific policy options” to the board at its September meeting.
Brown is one of 13 members on the CalPERS board. According to its governance policy, the board can delegate powers to its investment committee, staff and consultants to make investment decisions. Rules require the board to monitor those given delegated authority and also to “take corrective action when appropriate”.
Former board member and investment staffer JJ Jelincic, also a frequent CalPERS critic who challenged board president Henry Jones in his re-election last year, as Buyouts reported at the time, said what Brown was asking for was possible but potentially hard to enforce. “Staff does a lot of things it doesn’t tell the board,” he said.
If CalPERS has already signed limited partnership agreements with private equity firms, it may be difficult to get out of them, though Jelincic said the firms could let them out of them to “engender goodwill”.
“We should make investments at a consistent pace when appropriate and not limit ourselves arbitrarily,” Jones told Buyouts in an email. “I believe our strategy must go forward.”
Board members Jason Perez, Lisa Middleton and Stacie Olivares declined to comment on Brown’s statement.
“I’m not inclined to engage in a discussion outside of a board meeting that properly should be conducted within a board meeting,” Middleton said in an email.
No other board members responded to requests for comment.
The CalPERS board governance policy can be found here.
This story first appeared on sister title Buyouts.