By Ed Mendel
Monday,January 16, 2012

Mitt Romney’s presidential campaign is putting the spotlight on private equity, which public pension funds such as CalPERS and CalSTRS helped flourish and now need for better-than-average earnings.

Romney became wealthy while leading Bain Capital, a private equity firm he said created “tens of thousands of jobs” by buying and then selling troubled or stagnant companies after making them efficient, better managed and able to grow and prosper.

But conservative Republican candidates, Newt Gingrich and Rick Perry, accuse Romney of “looting” corporations and “vulture” capitalism, enriching a few while leaving a trail of layoffs, massive corporate debt and bankruptcies.

Public pensions can play a key role in leveraged buyouts. A private equity firm puts up a token amount, gets a larger down payment from a pension fund or other limited partner and borrows most of the money, using the takeover target’s assets as collateral.

“Private equity owes its explosive growth largely to America’s pension funds,” a New York Times story said in April 2010. “Buyout funds raised $200 million in 1980 and $200 billion in 2007. According to Prequin, a financial data provider, public pension funds were the biggest contributors over that period and now have $115.9 billion invested in private equity.”

Private equity is expected to yield more than stocks, often 3 percent or more above market. Higher private equity yield is part of the rationale for the CalPERS and CalSTRS earnings forecast, 7.75 percent, which critics say is too optimistic and conceals debt.

After CalPERS and CalSTRS lost a third or more of their investment funds during a deep recession and stock market crash, a combined loss of about $170 billion, they both responded by shifting more of their investments into private equity.

The California Public Employees Retirement System, after investments plunged from $260 billion in fall 2007 to $160 billion in March 2009, increased its private equity target from 10 to 14 percent of the portfolio. The fund was $226.5 billion last week.

The California State Teachers Retirement System, which fell from $180 billion in October 2007 to $112 billion in March 2009, increased its private equity target from 9 to 12 percent of the portfolio. Its fund was $146 billion on Nov. 30.

In what Romney and some economists call “creative destruction,” private equity firms can impose tight cost controls as well as layoffs when trying to restructure companies for future success.

Public pension boards, dominated by public-sector labor union representatives, can be in the uncomfortable position of having a private equity partner accused of unfairly squeezing private-sector unions to boost profits.

CalPERS and CalSTRS have received at least two appeals in recent years to use their ownership clout to aid labor in struggles with private equity firms — Blackstone at the San Francisco Hilton hotel and TowerBrook at Bevmo! alcoholic beverages stores.

The scramble for pension fund seed money during a private equity boom that peaked around 2007 led to a corruption scandal at CalPERS.

Private equity firms agreed to pay the “placement agent” firm of a former CalPERS board member, Al Villalobos, more than $50 million in fees for help in obtaining funds from CalPERS.

A private equity firm led by Gerald Parsky agreed to pay Villalobos $4 million. Parsky chaired the Commission on Public Employee Post-Employment Benefits, which found few major pension problems and focused on unfunded retiree health obligations.

The state attorney general filed a bribery-related civil lawsuit in May 2010 against Villalobos and a former CalPERS chief executive, Fred Buenrostro. A trial for Buenrostro has been set for May. A Villalobos trial is expected later this year.

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