HARRISBURG — With a requirement that PSERS high executives be fired hanging within the air, these beleaguered leaders on Thursday continued to induce Pennsylvania’s largest pension fund to double down on their controversial funding technique — by pouring $1.2 billion extra into “various” investments promoted by high-fee Wall Avenue advisers.
Six board dissidents, upset on the plan’s lackluster returns, known as on Thursday morning for the 15-member board to fireplace its government director, Glen Grell, and its investments chief, James H. Grossman Jr., the highest-paid worker of state authorities.
However Grossman got here out swinging Thursday afternoon on the board assembly on the PSERS fund’s workplace right here that started solely hours after his detractors delivered to the board’s chairman their written demand for his dismissal.
Grossman instructed the board that one in every of his bets had simply hit the jackpot, on paper at the least. An $85 million PSERS funding, Grossman mentioned, in a California maker of high-fashion nurses’ uniforms was price $329 million now that the start-up had offered its shares to the general public. Grossman acknowledged that PSERS, as an insider, couldn’t promote its shares and money within the winnings till November, on the earliest.
Grossman additionally made repeated shout-outs to Grell, saying that he, too, had performed a key function in choosing the funding.
“A four-times enchancment is the grand slam,” mentioned board member Jason Davis, an economics trainer who didn’t signal the ouster letter. “Nicely performed to you and the staff.”
PSERS — the $64 billion Public College Workers’ Retirement System — has been under investigation by prosecutors and the FBI since at the least March in a probe wanting into its purchases of Harrisburg actual property and into the board’s since-retracted misstatement of an exaggerated quantity for its funding returns.
The fund needed to clear a “hurdle” of a 6.36% common annual return over 9 years to spare lecturers and college staff a bigger payroll deduction — and the fund’s management embarrassment. That bar appeared comparatively low. In spite of everything, the S&P 500 index of huge U.S. shares paid greater than 10% a yr throughout these years.
At first, the board final December endorsed a determine – 6.38% – indicating it had narrowly cleared the bar. However this spring, it retracted that determine as flawed and mentioned its precise return was solely 6.34%, forcing newer college staff to pay extra for retirement.
On the identical time, a rising variety of board members has grown restive with the plan’s management and monetary efficiency. They complained that PSERS by investing closely in unique non-public ventures, had missed out on positive aspects from a booming inventory market – and that its returns over the previous 10 years have been beneath these of different state plans.
Nonetheless, these statistics didn’t appear to shake the administration’s relentless give attention to betting but extra money on Wall Avenue funding managers.
Earlier than the transfer by some board members to oust Grell and Grossman, the 2 males had known as for the plan to place one other $1.2 billion into enterprise capital companies, actual property enterprise and hedge funds.
This was an excessive amount of for the dissidents who of their letter calling for the firing dismissed these proposed investments as “enterprise as traditional” amid a disaster.
Whereas the vote on the brand new investments is to happen Friday, it might be overshadowed by the push for the firings. Such a dismissal vote isn’t on the agenda, however any board members might name for votes on any subject. It stays unclear whether or not the six critics have picked up the 2 votes wanted to kind a majority on the 15-member board and power the terminations.
On Thursday when Grell was requested concerning the marketing campaign to oust him and Grossman, Grell responded, “I don’t know what you’re speaking about,” and walked away.
Of their letter urging the shakeup, the dissidents reacted with irritation to the truth that the administration had booked an “academic” lesson for the board Thursday to be led by an government from Bridgewater Associates, the world’s largest hedge fund.
The letter famous unhappily that PSERS has paid Bridgewater $560 million in charges over the past 20 years. Like many such investments, it’s unclear how a lot the offers will ultimately yield.
Within the lesson, Bob Prince, Bridgewater’s co-investment chief, sought to justify the type of broad, advanced funding method that PSERS has adopted beneath Grell and Grossman.
“The one manner,” he mentioned, to provide robust returns “is a diversified portfolio that cuts throughout asset courses” just like the one his agency had helped PSERS construct “over a very long time.”
Ian Toner, chief government officer of Verus, the Seattle agency the board recently hired for $810,000 to supervise investments through the FBI investigation, sounded a distinct be aware, seeming to echo the criticisms of Grossman’s foes. “Simplicity in portfolio construction is commonly extra preferable and simpler than trendy,” Toner mentioned.
Among the many investments up for consideration Friday, one includes an organization that’s Philadelphia’s largest private-equity investor and one other that drew consideration for its offers involving a New York skyscraper as soon as owned by the household companies of former President Donald Trump’s son-in-law Jared Kushner. Here’s a have a look at these two proposed offers.
LEM Multifamily Fund VI. That is the most recent fund from LEM Capital, the big Philadelphia private-equity firm that invests in growing older condo complexes. LEM says its technique is to “add worth and improve rents.” Its homeowners embody Ira Lubert, a principal within the Rivers On line casino in Pittsburgh and a former board chairman for Penn State College.
PSERS has invested $210 million in different LEM funds over the past 15 years and gotten again $232 million, as of final June, with hopes of extra to return. As with different non-public offers, it’s laborious to say how good the ultimate returns are till the funding is full. The fund paid the agency extra $8 million in charges in fiscal 2019, the final yr reported.
LEM is only a sliver of PSERS’ involvement with Lubert. Over the past 20 years, it has paid greater than $200 million in charges to a wide range of funds he has based.
Brookfield Strategic Actual Property Companions IV. That is the most recent fund from Brookfield Asset Administration, an enormous Toronto-based hedge-fund supervisor. PSERS has dedicated greater than $600 million to earlier Brookfield funds since 2012, and as of June 30 gotten about $400 million of that again. Final yr PSERS paid Brookfield over $14 million in charges.
Brookfield invests in workplace buildings world wide. Considered one of Brookfield’s best-known investments, by an earlier fund that included cash from PSERS, was its reported $1.3 billion cost in 2018 to a agency headed by the Kushner household companies for management of a troubled office tower at 666 Fifth Ave. The Kushners had paid $1.8 billion for the tower again in 2007, however was having hassle preserving tenants.
PSERS put $80 million within the Brookfield fund that invested in 666 Fifth, one in every of many properties in that fund. PSERS estimates its stake is now price $77 million.
To make certain, PSERS investments in earlier Brookfield funds, in 2012 and 2015, have earned double-digital earnings as actual property costs went up lately, the pension plan says. A lot of that acquire continues to be simply on paper as Brookfield has but to promote the these properties at their estimated new, larger costs.