The CalPERS board on Monday will take up discussion of AB 1967, a bill that would prohibit the pension system from investing in private equity funds whose management companies are partially owned by sovereign wealth funds of governments with poor human rights records. It already has received a staff recommendation opposing the legislation, and you can view both the bill and the CalPERS staff recommendation here: CalifBill1.pdf StaffRec.pdf
AB 1967 also would apply to the California State Teachers’ Retirement System (CalSTRS), whose trustees have already come out in opposition.
I spent time on the phone yesterday with two people: Alberto Torrico, a California assemblyman who authored AB 1967, and Doug Lowenstein, head of the Private Equity Council. I also attempted to contact bill sponsor SEIU, but was unsuccessful. My conclusion was that both the bill and its counter-arguments are intellectually dishonest. This could be reasonably resolved, but it would likely take more political courage than anyone is willing to muster.
As I wrote yesterday, I don’t have any philosophic qualms with a state legislature setting investments boundaries for its public pension systems. The people have a right to oppose support of particular industries or nations. Examples include bans on tobacco/firearm investments. The people also have the right to withhold their investments in order to influence foreign governments, whether it be in today’s Sudan or 1980s South Africa. This is not interfering with the federal government’s ability to make foreign policy, any more than were those silly boycotts of French products at the beginning of the Iraq War.
So it’s the specifics here that I have a problem with. AB 1967 specifically targets sovereign wealth funds of nations that are not signatories or parties to at least five of six specified international human rights treaties. That sounds okay on its face, except: (A) The United States itself has not yet ratified half of those treaties; and (B) The 5/6 qualification means that a country may not have signed the treaty relating to torture or the rights of children.
Assemblyman Torrico responds to (A) by pointing out that California has often gone further than has the federal government in promoting certain social goals. It has stricter environmental standards, for example. That’s fine, but isn’t it possible that some of the targeted nations have the same types of partisan spats that have precluded our own Senate from ratifying the treaties – rather than the existence of actual policies that violate human rights? Moreover, the bill provides that the prohibition can be lifted if the U.S. State Department provides a specific human rights report that validates a nation’s compliance with acceptable human rights. So the bill on the one hand dismisses the U.S. government’s opinion, and on the other hand accepts it. Contradiction city.
As for (B), it’s just unacceptable. If you believe the treaties are paramount, then you can’t be selective.
There also is the issue I raised yesterday, about how the bill only targets private equity firms that have sold management company stakes to targeted sovereigns. There is no valid reason for prohibiting investment in funds from these firms, but not in funds from firms that also include targeted sovereigns among their limited partners. Torrico’s reply was that this bill – or a subsequent bill – may include such a provision, but he had no good explanation as to why this one didn’t.
Some critics believe the reason is that SEIU sponsored the bill, and has been a vocal critic of The Carlyle Group (which is partially owned by a targeted sovereign). That’s also the theory behind why this bill targets private equity, but not hedge funds or public equities like Citi.
Torrico insists he – not SEIU – wrote the bill, and that he is unaware of any disputes between SEIU and Carlyle. I’ll trust him on the former, but am embarrassed for him on the latter. Looks like he was used, and didn’t have the common sense to play self-defense by using Google. Really, how could he not have known?
All of this said, the counter-arguments don’t hold too much water. Both CalPERS and CalSTRS claim that they would lose billions in returns if banned from investing with firms like Carlyle and Apollo Management. For example, CalPERS notes that such firms currently manage more than $9 billion of the pension’s money, and that CalPERS would have made $3 billion less had it not been able to make such investments.
I don’t dispute the numbers, but certainly take issue with the logic. Had this bill passed ten years ago, is CalPERS suggesting that it would have just tucked that $9 billion under its mattress? Or invested in firms that only broke-even? If private equity is such an out-performing asset class, why wouldn’t CalPERS have generated strong returns from other firms? Maybe not $3 billion but, by the same token, maybe more. There is no way of knowing. Ditto for the CalSTRS “math.”
CalPERS also puts forth a suggestion that passage of this bill could cause it to leave the private equity asset class altogether, because other firms may not want the hassle of such a politically-influenced LP. What a load of bunk! We heard this same argument during the disclosure debate, and California pensions did just fine. GPs will keep going to CalPERS for the same reason they do now – massive commitment capabilities. And it’s also worth noting that CalPERS has used similar arguments in the past when opposing just about every legislative measure that would restrict its investment activity (tobacco, South Africa, etc.).
That’s their prerogative, but it does not negate the legislature’s larger authority and responsibility.
So what to do? Rip this bill up and write a new one. Make it more far-reaching, to cover other asset classes and private equity firms with targeted sovereigns as limited partners (not just owners). And either only include treaties the U.S. has ratified, or all six of the listed ones. In short, be consistent. This would clearly make passage far less likely, even in a state with a Democratic legislature with a moderate GOP governor. But at least the debate would be legitimate. After that, it’s up to the people – via their representatives – to decide.