Saturday, November 17, 2012

Private Equity: Disclosure (lack of) and Cutting Losses

In September, 2011 the NYCERS trustees hired an new investment consultant for private equity investments. The new firm is StepStone Group LLC. They replaced Pacific Corporate Group who had been under contact since 1998 when Hevesi was Comptroller.

At the September 25, 2012 NYCERS Board of Trustees investment meeting, StepStone issued a 36 page report on the March 31, 2012 status of the NYCERS private equity investments. The private equity reports always lag the reporting of the more traditional investments.

The copy of the report included in the "revised" public agenda for the meeting was missing the last 10 pages of the report which comprised two exhibits labeled:

--- IA) Portfolio Investments by Status
--- IB) Performance by Vintage Year

The "revised" agenda is available on the Comptroller’s web site. I suspect that the revision was due to the fact that the staff at the Comptroller’s office forgot to redact the information showing how bad the situation is with respect to the NYCERS private equity investments.

From my previous experience of requesting investment information under New York State F.O.I. Law, NYCERS purposely hides specific performance information about the private equity managers. NYCERS also hides information about the real estate managers. NYCERS is required by the NYS Freedom of Information Law to provide this information to the public. You can read a detailed advisory opinion (OML-AO-3931) from the State of New York Department of State - Committee on Open Government addressing this specific issue.

Of course, if an agency is not sued in court for violating the NYS Freedom of Information Law, it can effectively violate the law with impunity.

On a more basic level, the report was paid for with the members’ and retirees’ money. The report belongs to them and not the trustees, some of whom are not even participants of the pension system. StepStone tries to claim that the report is confidential but that is not possible when functioning in the public sector as indicated in the advisory opinion referenced above.

Sale of eleven PE partnerships

Equally disturbing is the start of the sale of NYCERS private equity partnerships in the secondary market.

In the part of the report released to the public StepStone notified the trustees of the sale of eleven of the 141 partnerships in the secondary market. The sale was done in two parts. The first included five partnerships sold at a 6.6% discount. The second included the remaining 6 sold at a 5.4% discount.

Stepstone does not indicate why they were sold. It does not indicate why these eleven were chosen. It does not indicate whether these eleven were highly rated assets or of inferior quality. It does not provide a cash flow history of any of the eleven partnerships. Without the cash flow history it is impossible to determine the final performance of any of the eleven partnerships.

StepStone does not detail the financial impact of the quoted discount of the two sales. It focuses on the idea that the sales have released NYCERS from an unfunded liability of $129.5M. This sounds a lot like cutting your losses.

Wednesday, November 14, 2012

Disaster Recovery and Hurricane Sandy

With Hurricane Sandy’s knockout of major office buildings in lower Manhattan, metro area organizations will all be reviewing the effectiveness of their disaster recovery plans.

In 2004, I began the effort to establish an alternative disaster recovery office site for NYCERS. It is unclear, eight years later, whether the NYCERS Long Island City recovery site would actually have been able to function as an effective disaster recovery site, if Hurricane Sandy had flooded 335 Adams Street as it did 55 Water Street, the home of the NYC Teachers Retirement System.

Monday, November 12, 2012


As of June 30, 2012 the Comptroller reported to the NYCERS Trustees that the assets of the system were valued at $41.620B. The June 30, 2011 value was $41.623B. That is a small drop for FY-2012.

As a point of reference the value in 2000 was $42.997B.

For the last 12 years this has truly been the wilderness for NYCERS investments.

The whole picture is even worse.

The annual benefit payments have gone from $2.11B in 2000 to $3.568B in 2011. In addition the trustees have for some reason chosen to expand into asset classes that are not prudent for a large mature public pension fund. The trustees have also allowed investment fees rise from $32M in 2000 to $145M in 2011.

You can see from the table below the effects of the Kool-Aid. Just because everyone else is jumping off the cliff, that doesn't mean it is a good idea.

NYCERS Asset Class Expansion
Asset Class200020112012
US Equity – Active Managers $3.196B $2.581B $2.447B
US Equity – Emerging Managers $0.247B $0.666B $0.667B
US Equity – Passive: Russell 3000 $20.733B $6.809B $5.962B
US Equity – Passive: S&P 500 $3.934B $3.392B
US Equity – Passive: Small & Mid-Cap $2.861B $2.550B
US Equity – Environmental $.064B $.063B
US Equity – Activist $.106B $.006B
International Equity – Active $4.460B $3.646B $2.293B
International Equity – Passive $2.040B $1.315B $1.390B
International Equity – Environmental $.180B $.173B
International Equity – Activist $.290B $.214B
International Equity – Emerging Markets – Active $1.478B $1.572B
International Equity – Emerging Markets – Passive $.558B $0.960B
Hedge Funds $0.078B $0.929B
Private Equity Managers $.008B $3.169B $3.655B
Real Estate Managers $1.268B $1.670B
US Fixed Income – Government/Mortgage/Corporate $9.811B
US Fixed Income – Government $1.070B $1.058B
US Fixed Income – Mortgage $2.845B $3.003B
US Fixed Income – Corporate $2.291B $3.006B
International Fixed Income $.053B $.057B
US Fixed Income – Treasury: Inflation Protected/Active $.762B $.695B
US Fixed Income – Treasury: Inflation Protected/Passive $.251B $.228B
Fixed Income – Emerging Managers $.095B $.104B
Fixed Income – High Yield $1.712B $1.288B $2.624B
Fixed Income – Convertible Bonds $.560B $.546B
Fixed Income – Opportunistic/Distressed $.450B $.435B
In-House - Short Term $.596B
External – Short Term $2.483B $1.384B
In-House Targeted $.118B $.466B $.500B
In-House Mortgage $.010B
Securities Lending & Bank CD’s $.007B $.007B
Total $42.997B $41.623B $41.620B