Sunday, March 29, 2009

CalPERS demands changed fees

Look at this story in today's Wall Street Journal:

CalPERS, the California public pension fund that is one of the biggest investors in hedge funds, is demanding better terms from funds, including lower prices and "clawbacks" of fees if performance weakens. The $172 billion pension fund is a bellwether in the money-management business. A Calpers investment can help money managers like hedge funds attract other clients.

While other investors are pushing for fee cuts, Calpers, which has $5.9 billion in hedge-fund investments, holds significant clout. "Calpers is the 800-pound gorilla, pushing so much money through the system," said Eric Roper, chairman of the hedge-fund practice at New York law firm Gersten Savage LLP.

That's the least of Calpers problems! How about their unfunded private equity commitments?

Look at Calpers private equity commitments as of September 30, 2008. It's off the charts. And these returns are also skewed because they don't include the valuations of private companies which are almost hopelessly underwater.

Here's a partial listing of those private equity folks that benefited from Calpers. The first figure is the commited capital. The next figure is the actual cash invested. The difference is the unfunded private equity committment.

Apollo: $4.1 billion, $2.7 billion
Aurora: $650 million, $267 million
Avenue: $1.4 billion, $780 million
Blackstone: $1.4 billion, $1.2 billion
Candover: $643 million, $480 million
Carlyle: $4 billion, $2.1 billion
CVC: $2.3 billion, $1.3 billion
First Reserve Fund: $1.1 billion, $685 million
Leonard Green: $850 million, $455 million
Hellman & Friedman: $1.0 billion, $762 million
KKR: $1.6 billion, $880 million
Levine Leichtman: $450 million, $389 million
Lexington Capital: $400 million, $392 million
Madison Dearborn: $710 million, $634 million
MHR: $400 million, $218 million
New Mountain: $550 million, $165 million
Oak Hill: $375 million, $151 million
Pacific Corporate Group: $1.9 billion, $800 million
Permira: $573 million, $388 million
Providence: $525 million, $297 million
Silver Lake: $1.1 billion, $450 million
Tommy Lee: $640 million, $475 million
Tower Brook: $575 million, $220 million
TPG: $3.2 billion, $1.5 billion
Wayzata: $325 million, $218 million
Welsh Carson: $650 million, $601 million
WLR: $698 million, $405 million
Yucaipa: $764 million, $481 million

Now take a look at Zero Hedge's analysis of Calpers -10.7% IRR that they give for Apollo Investment Fund VI L.P.

We randomly picked as a case study the Apollo Investment Fund VI L.P., which CalPERS has committed $650 million to, actually invested $508 million into, withdrawn $10.9 million from and present the residual value (including the withdrawn amount) as $450 million, or a -10.7% IRR. Now we don't have reason to believe that CalPERS is fudging this number: after all it is reporting merely what Apollo is telling it.

So the next question is, is this -10.7% IRR indicative of the investments in Apollo VI?

The names that constitute the $10.2 billion in committed capital Apollo VI are:
Realogy (on verge of bankruptcy)
Harrah's (on verge of bankruptcy)
Claires (on verge of bankruptcy)
The debacle that was the Huntsman LBO
Berry Plastics
Verso (bankrupt)
Jacuzzi brands

We highly doubt -10.7% is anything even remotely close to where CalPERS should consider its residual equity value in Apollo VI. And by fair estimates, this is merely the tip of the iceberg. Nonetheless, presenting public data that shows that the public pensions manager is disclosing over $14 billion in profits when it is hiding potentially much more than that in losses could be interpreted as borderline illegal. The question is, is this a responsibility of Apollo (to show the true sad state of affairs), or of CalPERS (to actually check these numbers and not to pull a Fairfield Greenwich "sorry, we had no clue what was really going on until it was too late").

So CaPERS talks tough with hedge funds, while their indulgences in private equity gets swept under the rug.

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