Sovereign fights

Should California pass a bill limiting pensions’ ability to invest in sovereign wealth-linked private equity funds, it may have serious unintended consequences, writes Amanda Janis.

California legislators may soon gravely handicap some of the world’s most successful institutional investment programmes.

The state’s lawmakers are set to debate a bill that would prevent the US’ two largest public pensions, the $253 billion (€164 billion) California Public Employees’ Retirement System and the $167 billion California State Teachers’ Retirement System, from investing in non-listed private equity funds and firms partially or wholly owned by certain sovereign wealth funds.

Unlike a federal Congressional task force that has mainly been exploring national security and political fears associated with foreign ownership of US assets, the issue raised in California is about human rights. The bill, AB 1967, specifically targets sovereign wealth funds with links to countries that have not signed at least five of six international treaties on human rights.

CalSTRS has vehemently opposed the bill, saying it will have little effect on human rights issues. Further, it noted that private equity is the “high-octane” in its investment portfolio, and the best performing funds are precisely those that have attracted – and will continue to attract – investment from sovereign wealth funds. An inability to invest just with The Carlyle Group and Apollo Management, both of which have sold stakes to Abu Dhabi-linked funds, could result in five-year revenue losses of as much as $5 billion, CalSTRS estimated.

CalPERS, yet to take a stance on the bill, would likely be placed in an even more precarious position, as the pension giant not only invests with Apollo and Carlyle, but owns lucrative stakes in their management companies.

Setting aside the fact that both state pensions have their own geopolitical investment policies in place, legislators should pay special attention to a statement recently made by CalSTRS chief executive Jack Ehnes: the bill ignores the realities of the global financial marketplace.

If pensions were to truly cease investing in anything generating profits for sovereign funds from certain Asian and GCC countries, thought to be the bill’s main targets, CalSTRS and CalPERS would have to stop investing in much more than top-tier private equity funds.

Sovereign funds are firmly rooted in the world’s economy and touch numerous aspects of public pensions’ investment portfolios, across all asset classes. They own stakes in stock market exchanges like the Nasdaq and the London Stock Exchange, as well as in investment banks including UBS, Morgan Stanley, Citigroup, Merrill Lynch and Bear Stearns. They also own stakes in major international companies ranging from chipmakers to car manufacturers.

And, of course, many sovereign funds exist in the first place because of oil profits – would passage of a bill like AB 1967 mean public pensions will eventually be prevented from investing in petrol companies and certain natural resource projects?

While perhaps well-intentioned, the bill threatens much more than CalPERS’ and CalSTRS’ relationships with a handful of fund managers. Their public sector members should lobby state legislators – hard.