Monday, May 23, 2011

Private Equity Underwater

Recently, I have been trying to get NYCERS to turn over the detail quarterly reports of the performance of the NYCERS private equity and real estate investments.

Note: These investments are generally limited partnerships where NYCERS pays two percent annual fees and 20% of the profits to the general partner in return for 2 to 3% above the S&P 500 index. The trustees, however, never see the actual contracts with these investment managers and they really don’t know what the details are. NYCERS has been investing in limited partnerships since FY-2000. Hevesi was the NYC Comptroller and the NYCERS designated investment manager at that time. Hevesi was instrumental in moving the real control of the investment contracts from the trustees to the Comptroller’s office.

NYCERS gets these reports from the Comptroller’s office. The reports are written by investment consultants that are under contract to NYCERS. NYCERS refuses to make these reports public. My opinion is that the data in the reports are extremely embarrassing and that, while some investments are doing well, others are a disaster, for example: Shamrock Capital.

As of June 30, 2010, the alleged value of these investments, aka “fair market” value, was $3.4B according to the Comptroller’s general quarterly report. Since there are no independent market values for these assets, any stated value is just a guess. The Comptroller stopped putting the general quarterly reports on his web site in 2005. The last one posted was for the March 31, 2005 quarter.

NYCERS, however, must file annual NY State Insurance Department Reports (SIR) as of June 30 of every year on March 1 of the following year. Interestingly the SIR requires that NYCERS list all private equity investments along with their actual costs and their fair values.

The NYCERS SIR for June 30, 2010 states that the actual cost of private equity investments was $4.48B and their fair value is $4.12B. After investing for 11 years, NYCERS is underwater with a -8.0% loss on its private equity investments. NYCERS Russell 3000 index performance for the last 10 years is -0.9%. The good news is the 10 year loss for private equity as of June 30, 2009 was -15%.

What is truly insulting about this comparison is that NYCERS paid the private equity managers $108.1M in FY-2010 and only $535,817 to it two Russell 3000 index managers who managed $8.56B.

As a postscript, I have very little confidence in the accuracy of these figures because of the lack of internal control of the accounting of investment activity at NYCERS.

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