CalPERS, the country's largest pension fund, announced that it has paid private equity investments about $3.4 billion.
The amount garnered a healthy dose of controversy due to the company putting money in so-called, high-risk investments.
As reported by The Los Angeles Times, the California Public Employee's Retirement System said that it also paid $700 million in performance fees just for the last fiscal year. This announcement comes as pundits are questioning the wisdom of pension funds investing in such complicated corporate deals as startups and leveraged buyouts.
CalPERS officials clarified that the private equity investments that it made generated $24.2 billion in net profit for the state's retirees over the 25-year period, indicating a great performance which, according to the company, make up for the sectors' added risk, complexity and cost.
And similar to other public pension funds, the company has relied on the potentially large returns on private equity investments to help it finance benefits for its 1.7 million current and future retirees, in addition to avoiding turning to taxpayers to make up its shortfalls.
David Crane, a lecturer from Stanford University said, "Returns from those sort of investments need to be much higher than return on assets not bearing similar risks and especially to justify such huge fees," Crane also said, "From what I read today about CalPERS' returns on private equity, it's hard to see that being the case."
In a column report by Bloomberg View, it asked if CalPERS' investment is too much, too little or just right. As noted, it came about to 12.3 percent of gross realized gains, lower than the usual 20 percent private equity fees.
Moreover, according to one Idaho public pension officer, he thought that CalPERS' number would be higher and said that private equity is actually one of the company's top performing assets that produced returns of 12 percent over the past decade.
In a similar report by The Salt Lake Tribune, CalPERS profits have become a subject of debate over whether taxpayer-financed pension funds should take on the risks and complexity common in private-equity deals, or whether investors getting what they deserve.
Also, pensions now have turned to alternative investments rather than traditional stocks and bonds to boost returns needed to match lifetime benefits to government workers.
As said by Reena Aggarwal, a finance professor, "CalPERS might unleash a trend here, because CalPERS is going through this exercise, it's going to mean that other large institutional investors are going to be asking their private-equity firms the same questions."
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