CalPERS ex-board member tells PEI of credit line concerns

Michael Flaherman says his fears about CalPERS’ exposure are left unanswered, despite a memo from the pension describing fund-level credit lines

An ex-board member of the California Public Employees’ Retirement System thinks the $320 billion pension fund could be doing much more to assess its exposure to fund-level credit lines.

Michael Flaherman, who spoke during the CalPERS board meeting on Monday to raise the issue of general partner credit lines for the second time, told Private Equity International he has not seen the level of reporting or analysis he originally requested in December 2015.

According to documents obtained by PEI, CalPERS chief investment officer Ted Eliopoulos wrote a memo to the investment committee, dated 3 February 2016, titled “Use of credit facilities by private equity funds”. The 437-word memo, Eliopoulos wrote, was a response to the committee’s request for further information on the use of credit lines by GPs.

It outlines the key questions CalPERS staff asks when reviewing the topic when it is included in limited partnership agreements, such as what would be used as collateral, how long the facility can be outstanding and the size of the credit line.

It also describes the benefits to LPs, including a decrease in the frequency of capital calls and boosting performance, and to GPs, such as the ability to reach preferred return more quickly and to have more control in timing portfolio investments, the memo said. But this was not enough for Flaherman.

“I approached the [investment] committee in 2015 because, as a former member of the board and someone who’s now a retiree of CalPERS, I’m just concerned there are systemic risks associated with the exposure to subscription lines of credit for limited partners,” Flaherman told PEI. “I was encouraging the committee to inquire about their exposure because it’s an important issue, and I don’t think this [memo] really does very much.”

Flaherman added that CalPERS is likely to have access to the data needed to calculate its exposure to private equity GPs’ credit lines, because those numbers should be contained in the financial reports it receives from fund managers.

“It’s striking that you have [co-chairman of Oaktree Capital Management] Howard Marks, who works for a private fund manager, discussing the risks that these credit lines can present to LPs, and you have an LP here who can conduct a similar analysis but doesn’t outline these risks,” he said.

As a member of the public, Flaherman cannot instigate the launch of a process of looking into CalPERS-specific risks, he said, and it is up to the pension board’s discretion to conduct such analyses.

CalPERS did not respond to requests for comment.