As the Biden Administration warns that workers’ retirement funds may be getting fleeced by hedge funds and private equity firms, a top Democrat is reversing his own criticism of such investments and requesting authority to funnel billions of dollars of retiree savings to the private equity moguls. If that happens, it could mean a half-billion dollars of additional annual fees for a private equity industry that has produced some of the wealthiest people on the planet.
The push from New York City Comptroller Brad Lander, which is tied to the state budget’s impending April 1 deadline, comes as the pension system’s existing alternative investments have delivered what critics say are subpar returns for retirees.
It also comes as a recent report from LittleSis.org and the Private Equity Stakeholder Project shows that eight of the big private equity firms in which New York City’s pension fund has stakes are deeply invested in the fossil fuel sector — a sector that Lander has pledged to specifically divest from in his role as custodian of all five New York City pension funds.
Bloomberg reported last year that “Lander said he recently sat down with BlackRock Inc. Vice Chairman Matt Mallow to talk about how three of the city’s pension funds can actively divest from fossil fuels in both public funds as well as private equity and hedge fund investments.”
But now, Lander seems to be doing the opposite — frustrating those who believed the city’s pension funds had been moving in the right direction in terms of responsible investments.
As Nate Franco, a 10-year member of the main city pension fund, the New York City Employees Retirement System (NYCERS), told The Lever: “My concern is that we’ve taken a stand against fossil fuel investment, so increasing investment in private equity might lead us back into that realm indirectly.”
“The Only Reason To Increase Investments In Private Equity Is To Please Donors”
As the overseer of New York City’s $274 billion pension system, Lander exercises enormous power over one of the world’s largest institutional investors. Just one month after taking office, he is now pushing legislative changes that would empower him to shift another $27 billion of that money into private equity and private equity real estate, which have already cost the city’s largest pension fund, the $88 billion New York City Employees Retirement System, at minimum $1 billion over the past decade.
Lander’s new position is an about-face from the former City Council member’s rhetoric on the campaign trail, when he was backed by progressive Wall Street critics like Sen. Elizabeth Warren (D-Mass.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.).
Last April, Lander stated that as city comptroller, he would be committed to “reviewing the [city pension] funds’ positions with risky and speculative assets including hedge funds, private equity, and private real estate funds.” Lander also declared in his campaign that he “will complete responsible divestment from oil, gas, and coal corporations.”
Backing away from private equity investments and divesting from fossil fuels go hand in hand. Pension-backed private equity plays a critical role in continuing fossil fuel extraction.
When Lander won the election in 2021, he was in a prime position to make major changes. As Comptroller, Lander is custodian and investment adviser to all five New York City pension funds. In addition, he is a trustee for four of the pension funds, which means he votes on investments and other policy decisions. Currently, 16 percent of the largest New York City pension fund, NYCERS, is invested in private equity and real estate.
Such private equity investments can come with environmental risks. NYCERS, for example, has invested in the private equity firm KKR’s infrastructure funds. KKR has a major stake in the Coastal GasLink pipeline in British Columbia, which has been the scene of frequent protests from indigenous Canadians and violent responses from the Royal Canadian Mounted Police.
While advocates of fossil fuel divestment have typically focused on the existential danger that humanity faces from continued fossil fuel extraction, prominent academics have raised concerns about the way that private equity reports its performance, as has the SEC.
Investment guru Warren Buffett has called investing in alternative investments “a fool’s game.”Indeed, research from Ludovic Phalippou, a finance professor at Oxford, has found that private equity has consistently failed to outperform the markets, despite charging enormous fees.
SEC Chair Gary Gensler pointed out in a November 2021 speech that “when people debate the fees and performance of [much more tightly regulated] mutual funds, they draw on a great deal of knowledge and information. In contrast, basic facts about private funds are not as readily available — not only to the public, but even to the investors themselves.”
But instead of following through with his campaign promises, Lander is now pushing for changes to the city’s pension fund that could lead it to expand its investments in private equity firms with deep investments in the fossil fuel industry.
In testimony in early February to the Joint State Legislative Fiscal Committees’ budget hearings, Lander pressed for an increase in the size of the city’s “basket clause,” which currently prevents pension funds in New York from investing more than 25 percent of their investments in high-fee, high-risk “alternative investments” like private equity and private equity real estate. If Lander is successful, the changes to the rule would be included in the New York State budget, which is due April 1.
While only 16 percent of the city’s largest pension fund is currently invested in private equity and real estate, other high-risk investments have likely caused the fund to nearly reach its maximum under the basket clause, which is probably why Lander is pushing to increase that limit from 25 to 35 percent.
“The [basket clause] — which was established in 1960, in a dramatically different investment context — fails to reflect the realities of the modern investment world and hampers our ability to prudently diversify our portfolio, maximize our risk-adjusted returns, and save money in the long term,” he told the committee.
Indeed, New York and Georgia appear to be the only two states that legally cap the amount that pension funds can invest in alternative investments. But that doesn’t mean New York’s current restrictions should be abolished, said Edward Siedle, a former attorney with the Securities and Exchange Commission who has investigated misconduct at countless pension funds.
“Private equity is inconsistent with the transparency obligations of public pensions,” said Siedle. “There isn’t a single public pension in this country that’s knowledgeable about how to oversee or monitor private equity investments. They don’t know what they’re investing in, they don’t know the fees they are paying, they don’t know the risk they’re taking on. When you see a push to increase private equity, what you’re really seeing is a politicization of the investment process. The only reason to increase investments in private equity is to please donors.”
In response to questions, Lander’s spokesperson noted, “Brad made ambitious commitments to confront the climate crisis as a fiduciary to the City’s pension funds and is working hard to live up to them. Two of the three funds (NYCERS and BERS) that voted to divest their publicly-traded portfolios have done so. Brad is working actively with the third (TRS) to do the same. He’s engaged corporate leaders in key sectors, and pushed for more aggressive climate commitments and more disclosures… As we seek modest additional flexibility to diversify our portfolio across asset classes, we’ll continue to work ambitiously on responsible fiduciary investing that secures good returns for our members while confronting the systemic risks we all face.”
The spokesperson declined to provide specific details about the divestment process, including whether he had directed his staff to analyze the fossil fuel holdings in the portfolio.
Lander’s move comes over seven years after former New York Gov. Andrew Cuomo vetoed legislation to increase the basket clause to 30 percent.
In his veto message, Cuomo said: “The existing statutory limits on the investment of public pension funds are carefully designed to achieve the appropriate balance between promoting growth and limiting risk. This bill would undermine that balance by potentially exposing hard-earned pension savings to the increased risk and higher fees frequently associated with the class of investment assets permissible under this bill.”
Private Equity’s Fuzzy Math
In a brief interview with The Lever that occurred prior to receiving written comments from his spokesperson, Lander said that “private equity has consistently outperformed its benchmark, net of fees.” (“Net of fees” means that the performance is calculated with the fees paid to investment managers included, while “gross of fees” inflates the returns, as the fees paid to investment managers are excluded from return calculations.)
However, the NYCERS annual report shows that private equity has actually underperformed its benchmark significantly in the 5-year and 10-year periods ending June 30, 2021 gross of fees. New York City pension funds do not report their long term private equity returns net of fees. If they did, the numbers would inevitably show significantly lower returns for the asset class.
A Lever estimate found that, assuming generously that private equity fees were just 2 percent (they are often as high as 6 percent annually), the main pension fund NYCERS would have $1 billion more in assets today to devote to benefits if it had avoided alternative investments entirely in favor of the generic Russell 3000 index funds of American stocks.
Some pension funds have avoided the rush into alternative investments and reaped sizable benefits. Nevada’s pension fund has just 11.8 percent of its investments allocated to private equity and real estate, and many local pension funds in Pennsylvania have avoided the space altogether — earning them higher returns than their much larger counterparts. Nevada’s pension fund has significantly outperformed NYCERS for the ten years ending June 30, 2021.
The lost returns are money that could have gone to health care, or housing, or education that was instead lost in gambling with the market.
When told that NYCERS private equity investments had actually underperformed its benchmark, Lander did not provide additional comment.
During his comptroller campaign, Lander received more than $115,000 in contributions from the finance, insurance, and real estate sector. Much of that haul was subject to generous campaign matching funds from the City of New York, increasing the impact of the donations. Lander also received $2,500 from the head of research of the Loews Corporation, a multinational conglomerate with major holdings in the oil and gas industry.
If Lander’s proposed change goes through, it could lead the pensions to deliver additional investments and fees to its major asset managers — including the private equity and real estate mega-firm the Blackstone Group.
Blackstone CEO Stephen Schwarzman was one of President Donald Trump’s most steadfast backers, donating $3 million to his super PAC in 2020 and an additional $2.9 million to other pro-Trump groups during his presidency. NYCERS disclosed paying more than $7 million in fees to Blackstone in 2021.
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