calpers

By Ed Mendel
Tuesday, January 20, 2015

The apparent suicide last week of Alfred Villalobos, who faced a bribery trial next month, is a sad end for a former CalPERS board member paid more than $50 million by firms seeking money from the big pension fund.

Most of his fees came from private equity firms during the years leading up to the financial crisis in 2008. Some call the period private equity’s “golden years,” when leveraged buyouts of corporations yielded huge profits.

Villalobos flourished as a “placement agent” offering help for firms seeking investments or contracts from CalPERS, particularly after another former board member, Fred Buenrostro, became chief executive of the pension fund in 2002.

Now Buenrostro, who pled guilty to accepting Villalobos bribes, awaits sentencing in May. Pushed out of CalPERS in 2008 amid complaints of investment meddling, he received a $300,000 salary from Villalobos and possibly a Lake Tahoe condo.

During the boom years CalPERS private equity investments soared (see chart below from annual report, p. 21). Above-market returns expected from private equity help the pension fund meet its earnings forecast, said by critics to be overly optimistic.

Among several types of private equity the biggest and most profitable by far is the leveraged buyout. Loans needed to buy a company are typically obtained by using the targeted company’s own assets as collateral.

A long-running controversy over leveraged buyouts flared publicly in the 2012 presidential campaign of Mitt Romney, made wealthy by Bain private equity. Some of his Republican primary opponents called the buyouts job-destroying “vulture capitalism.”

Leveraged buyouts also have been sharply criticized by SEIU, a large and aggressive union with members in the public and private sectors. Some say corporate regulation, often pushed by public pension funds, makes private equity more attractive.

A boost for leveraged buyouts came from an analysis of 3,200 buyouts from 2000 to 2005 issued in December 2013 by researchers at the universities of Chicago, Harvard, Michigan and Maryland.

The analysis concluded “private-equity buyouts catalyze the creative destruction process, as measured by job creation and destruction and by the transfer of production units between firms.”

As the private equity boom ended with the financial crisis, a pay-to-pay scandal erupted in New York. Placement agents and private equity firms, some doing business in California, were accused of paying bribes to get public pension fund investments.

CalPERS did not know whether private equity firms were paying big placement fees for its investments. A board member who once worked for Villalobos, Kurato Shimada, chaired a committee that had blocked a staff move to require fee disclosure.

To read entire column, click here.