PSERS staff push hedge fund investments as dissenters on board seek ouster
HARRISBURG – With a demand to sack top PSERS executives, these beleaguered executives continued Thursday to urge Pennsylvania’s largest pension fund to double its controversial investment strategy – by injecting an additional $ 1.2 billion into “alternative” investments promoted by – honoring Wall Street advisers.
Six dissidents on the board, upset by the plan’s mediocre returns, called on the 15-member board Thursday morning to fire its chief executive, Glen Grell, and chief investment officer, James H. Grossman Jr., the highest paid employee of the state government. .
But Grossman stormed out Thursday afternoon at the board meeting at the PSERS fund office here which began just hours after his critics handed over to the chairman of the board their written request for his dismissal. .
Grossman told the board that one of his bets had just hit the jackpot, at least on paper. An $ 85 million PSERS investment, Grossman said, in a California manufacturer of high-fashion nursing uniforms was worth $ 329 million now that the startup had sold its shares to the public. Grossman admitted that PSERS, as an insider, could not sell its shares and cash in the earnings until November, at the earliest.
Grossman also repeatedly yelled at Grell, saying he too played a key role in choosing the investment.
“A quadruple improvement is the grand slam,” said Jason Davis, board member, professor of economics who did not sign the ouster letter. “Well done to you and the team. “
READ MORE: Everything You Need to Know About Meetings in the Pennsylvania Public School Employee Retirement System.
PSERS – the $ 64 billion public school employee retirement system – has been under investigation by prosecutors and the FBI since at least March as part of an investigation into its real estate purchases in Harrisburg and on the board’s misrepresentation of an exaggerated number for its returns on investment.
The fund had to overcome a “hurdle” of an average annual return of 6.36% over nine years to spare teachers and school employees greater payroll deduction – and the embarrassment of the fund’s leadership. This bar seemed relatively low. After all, the S&P 500 index of large US stocks has paid more than 10% a year over those years.
As a first step, the board of directors last December approved a figure – 6.38% – indicating that it had barely passed the bar. But this spring he removed that figure as being wrong and said his actual return was only 6.34%, forcing new school hires to pay more for their retirement.
At the same time, a growing number of board members have shown resistance to the leadership and financial performance of the plan. They complained that by investing heavily in exotic private companies, the PSERS had missed the gains of a booming stock market – and that its returns over the past 10 years had been lower than those of other public plans. .
Still, those statistics didn’t seem to shake management’s relentless focus on betting even more money on Wall Street investment managers.
Prior to some board members’ decision to oust Grell and Grossman, the two had demanded a plan to invest an additional $ 1.2 billion in venture capital firms, real estate firms and hedge funds. .
This was too much for the dissidents who, in their letter calling for the dismissal, called these investment projects “business as usual” in the midst of the crisis.
While the vote on the new investments is due to take place on Friday, it could be overshadowed by the surge in layoffs. Such a dismissal vote is not on the agenda, but any member of the board of directors can call for votes on any matter. It remains unclear whether the six critics garnered the two votes needed to form a majority on the 15-member board and force the layoffs.
When Grell was asked about the campaign to oust him and Grossman on Thursday, Grell replied, “I don’t know what you’re talking about,” and walked away.
In their letter urging the reshuffle, dissidents reacted with irritation that management had reserved an “educational” lesson on Thursday for the board, which would be headed by an executive from Bridgewater Associates, the world’s largest hedge fund.
The letter unfortunately noted that PSERS had paid Bridgewater $ 560 million in fees over the past two decades. Like many investments of this type, it is not known how much the transactions will end up paying.
In the lesson, Bob Prince, Head of Co-Investments at Bridgewater, sought to justify the type of broad and complex investment approach that PSERS followed under Grell and Grossman.
“The only way,” he said, “to produce strong returns” is a diversified portfolio that spans all asset classes “like the one his company had helped PSERS build” over a long period of time. “
Ian Toner, CEO of Verus, the Seattle-based company the board of directors recently hired for $ 810,000 to oversee investments during the FBI investigation, sounded a different note, appearing to echo criticism from enemies. by Grossman. “Simplicity in portfolio structure is often more preferable and efficient than fashion,” Toner said.
Among the investments under consideration on Friday, one is for a company that is Philadelphia’s largest private equity investor and another that has drawn attention for its deals involving a New York City skyscraper that once belonged to to the family businesses of former President Donald Trump’s son-in-law Jared. Kushner. Here is an overview of these two offers.
LEM VI Multifamily Fund. This is the latest fund from LEM Capital, the large Philadelphia private equity firm that invests in aging apartment complexes. LEM says its strategy is to “add value and increase rents”. Its owners include Ira Lubert, director of the Rivers Casino in Pittsburgh and former chairman of the board of directors of Penn State University.
PSERS has invested $ 210 million in other LEM funds over the past 15 years and raised $ 232 million, last June, with hopes of seeing more to come. As with other private transactions, it’s hard to say how good the final returns are until the investment is complete. The fund paid the company more than $ 8 million in fees in fiscal 2019, the most recent year reported.
LEM is only a fragment of PSERS ‘involvement with Lubert. Over the past 20 years, he has paid over $ 200 million in fees to various funds he founded.
Brookfield Strategic Real Estate Partners IV. This is the latest fund from Brookfield Asset Management, a Toronto-based hedge fund management giant. PSERS has committed more than $ 600 million to previous Brookfield funds since 2012 and, as of June 30, had recouped approximately $ 400 million. Last year, PSERS paid Brookfield more than $ 14 million in fees.
Brookfield invests in office buildings around the world. One of Brookfield’s best-known investments, by an earlier fund that included money from PSERS, was its $ 1.3 billion payment in 2018 to a company run by the Kushner family businesses for control. of a struggling office tower at 666 Fifth Ave. The Kushners had paid $ 1.8 billion for the tower in 2007, but were struggling to keep the tenants.
PSERS invested $ 80 million in the Brookfield fund which invested in 666 Fifth, one of the many properties of this fund. PSERS estimates that its stake is now worth $ 77 million.
To be sure, PSERS ‘investments in earlier Brookfield funds, in 2012 and 2015, generated double-digit profits as house prices have risen in recent years, according to the pension plan. Much of that gain is still on paper as Brookfield has yet to sell these properties at their new, higher estimated prices.