California Public Employees Retirement System (CalPERS) plan to implement its own multibillion-dollar private debt investment program has died after a state Senate Judicial Committee rejected a bill that would allow the pension system to retain financial control over borrowers. : confidential information.

The committee’s rejection last week is a major setback for the $ 469 billion pension system. CalPERS officials have planned to provide $ 23 billion to companies looking for loans in the private debt market to boost the system’s financial revenue.

A day after the Legislature vote, CalPERS Board Vice President Theresa Taylor asked at the board meeting whether the pension system could create an asset distribution that would allow it to receive its expected rate of return without an internal private lending program. Its current yield is 6.8%.

CalPERS did not need a legislative permit for its investment plan, but it did need state legislators to exempt it from public procurement laws to create a private debt plan.

CalPERS officials said some of the loan information needed to be kept confidential would otherwise prevent borrowers closed by banks from borrowing money from CalPERS. The legislature has previously allowed CalPERS to allow other pension systems to protect information on alternative investments, such as private equity, and hedge funds.

“We are looking forward to the next steps,” said CalPERS spokesman Wayne Diss.

The Senate committee defeated the CalPERS program by a 4-3 vote after hearing testimony from the influential CalPERS Retirement Group, the California 24,000-member Retired Public Servants Association (RPEA), according to a video of the meeting.

A spokesman for the group, David Soares, told the committee that the loans offered were “billionaires’ favorite public trust loans” that would be “exempt from collateral or disclosure of conditions that would simply pocket the proceeds”.

Soares, CalPERS Deputy Retired Attorney General for Santa Clara, Northern California, told CalPERS officials at a June 28 meeting with the retired group that they would focus not on high-income borrowers but on subscribers. : Loans that are part of pension schemes in portfolio companies as limited partners in private equity transactions. They are secured by the limited capital of limited partners and generally have an interest rate of 3% to 6%.

Soares also accused CalPERS of abandoning the bill change deal by revealing more borrowers.

CalPERS chief legislator Danny Brown later accused Soares of “unscrupulous” statements and “inflammatory speech”.

Brown faced a scathing interrogation from state Sen. Laon Lerde, D-Santa Cruz, who repeatedly asked him how the CalPERS board would oversee approving loans and whether it would review credit documents.

“For the most part, I would say that this is true,” Brown said, adding that the council may not review all of the loan documents.

Laird did not seem convinced that the council would intervene. “We are asked to fly here,” he said. “We want to know that there is accountability.”

Laird finally voted against the bill.

CalPERS spokesman DGis said the retirement plan always provides for certain disclosures about loans, adding additional changes earlier this month to reinforce those disclosures.

He said the bill includes disclosures of the borrower’s name and address, the dollar amount of each private loan given to each borrower, and the weighted annual yield of each loan. CalPERS also agreed to disclose the amount of unreleased loan liabilities, the principal amount owed by the borrower, interest, and whether the loan is in arrears for six months.

But other information, as the private debt bill shows, was kept secret. This includes information on proper review of private loans, identity of the borrower’s final owners, and information on collateral for private loans.

CalPERS already has a private debt plan, but it is run by external managers. The pension system has provided managers with about $ 450 million in direct lending programs. He invested about $ 4 billion in private debt funds in November.

Digis said the pension system would continue to invest in foreign managers, but would pay high fees.

“The RPEA opposition was a bad omen for its members; it could have cost CalPERS about $ 150 million over the next five years as we move to hire external managers,” DG said. “Our average pension is $ 38,000 a year. “If we pay an average of $ 30 million over the next five years, that’s a lot of money we need to use to pay for California civil servants, not to pocket Wall Street.”

Former CalPERS chief investment officer Ben Meng announced his support for private debt investment on December 16, 2019, at a board meeting. “This is an area that we have neglected in the past, especially given the changes in regulations after the global financial crisis,” he said. “Although it is not currently in the portfolio, we think it should be.”

Meng envisioned an 8% yield vision if CalPERS were to go private. But he resigned in August 2020 after it was revealed that he had approved a $ 1 billion investment in a fund run by a private equity firm, Blackstone Group, while holding a stake in the company in violation of state ethics rules.

The state investigation is underway.

The sudden death of the private lending bill comes after the state legislature passed it in the spring with little opposition.

The meeting was approved despite an analysis by the Assembly Judiciary Committee, which had previously outlined ethical issues at CalPERS. The analysis detailed Meng’s resignation, as well as the bribery of Alfred Villalobos, a former member of the CalFERS board’s placement agent, for the imprisonment of former CalPERS CEO Fred Buenrostro.

Private debt became an asset class for fast-growing pension programs after the 2008 financial crisis. Institutional investors began to look for more profitable investment tools after interest rates fell. According to data provider Preqin, pension programs have invested about $ 1 trillion in assets. Traditionally, private debt-seeking pension schemes have lent their money to private managers – funds that have technical skills in the private lending market.

Related stories.

The money received from Fired CalPERS’s equity managers can be repaid through direct lending

CalPERS CIO Ben Mann’s departure is related to his financial disclosure issues

CalPERS reports an initial yield of 21.3% for 2020-21

Tags: Ben Meng, California Civil Servants Retirement System, CalPERS, Private Debt, Private Lending, Theresa Taylor