u/Fourthimpressions

Since it seems like this issue resonated with a lot of people in last week’s post, I thought folks might be interested in digging deeper into the issue

Last week’s post showed that Oregonians are paying massive fees to Wall Street firms for promised huge returns on an overallocated private assets investment. Those returns never materialized. Kevin Olineck, director of Oregon PERS said, “The Oregon Investment Council is very highly invested in private equities, and they did less than what the public equity markets did.” He identified investment underperformance as "the largest reason" for the contribution rate increases now hitting school districts. Contribution rates determine the amounts districts have to pay into PERS in order to make sure current retirees continue to receive benefits since investments aren’t returning enough and fees are massive. The higher the contribution rates, the less money there is for teachers, support staff, etc.

https://preview.redd.it/hzshyiu2gc0h1.png?width=1172&format=png&auto=webp&s=50b679daa777d1f250cbf97da577ea4285c13ff6

This underperformance is historical and ongoing, but let’s look at what the future might hold. There are signs of major stress in the private credit markets. Private credit makes up only ~3% of the Oregon Public Employee Retirement Fund (OPERF), but Oregon directly holds investments in the most stressed funds.

The problem with allocating 55% of OPERF into private assets is that we don’t actually have any idea what those investments are worth. There is no public market mechanism that can price them. They are illiquid, meaning they are rarely bought and sold. The values are essentially decided on by the fund managers (note that fees are also paid based on the values the fund managers themselves set). Price discovery theoretically happens when assets are sold, but transactions have stopped happening, hence the liquidity crisis in the Private Credit market.

What that means for Oregonians is that we don’t have a clue what OPERF is actually worth. Given the secondary market discounts being offered for some of the Private Credit funds, it’s not unlikely that the Private Credit and Private Equity part of the portfolio is worth potentially 20-33% less than stated value, based on secondary market evidence including Saba Capital's documented offer of 33% below NAV for Blue Owl shares, a fund Oregon holds directly. That means that unfunded liabilities are likely far greater than stated. Which means that contribution rates will continue to increase, consuming a greater and greater part of school district budgets, meaning less money for teachers and support staff.

What all Oregonians, and especially PERS beneficiaries deserve, is transparency and accountability. Frustratingly, there is no actual mechanism for the state’s Chief Investment Officer (the highest paid state employee) and the Oregon Investment Council (OIC) to be held accountable to the public. OIC meets eight times a year on a Wednesday from 9:00am-1:00pm at the Oregon Treasury building in Tigard. Meaning that a concerned citizen has to take a random weekday off to attend. Oregonians can submit a written comment to OIC, but it must be submitted a week before the meeting. The OIC does take public comments from attendees as well. The state CIO and the OIC are under no obligation to respond to any public comments.

Here’s what accountability looks like in practice for Oregon’s $100 billion pension fund:

OIC should freeze all new private markets capital commitments until we know what the existing portfolio is actually worth.
OIC needs to commission an entirely independent mark-to-market stress test of OPERF’s private asset valuations, conducted by a firm with zero existing relationships with Oregon Treasury or its fund managers, and disclose the results publicly.
Publicly itemize every component of the $595 million ‘Commissions and Other Fees’ line in Oregon’s own audited financial statements.
Conduct an independent conflict of interest review of the of the direct hire from Oregon’s own investment consultant into the Director of Private Markets role.
Commission the statutorily required complete investment program audit that is five years overdue.
Attorney General Dan Rayfield should investigate whether fees paid on self-reported, potentially inflated private assets valuations constitute a breach of fiduciary duty to Oregon’s 415,000 public employee beneficiaries.

None of these asks are radical. All of them are the minimum owed to the teachers, firefighters, and public servants, like my wife, whose retirement depends on honest answers.

The OPERF private equity portfolio has underperformed a plain index fund by 31% over the past 13 years. Meanwhile, PERS beneficiaries and taxpayers have paid an obscene amount of money in fees to (mostly) Wall Street firms to manage that portfolio.

These are annual fees. The $290 million number on the chart is misleading as it doesn't include carried interest, etc. that's conveniently hidden in the commission and other fees line item that is half the $1.2 billion. (Also note the fees paid for managing the public equity part of the portfolio, same size as PE). So the real fees for the private equity part of the portfolio could be closer to $500-$700 million in annual fees. But like all things PE it is an opaque black box.

Here's how it works

Treasury investment team invests half of OPERF in private assets because that is the industry many came from immediately before government "service"
The fund horribly underperforms, but Wall Street collects fees regardless.
The returns are so poor that there isn't enough to pay out current retirees, so contribution rates rise to the point where school districts, municipalities and state agencies are paying 27 cents for every payroll dollar to make up the difference.
Budgets aren't elastic so if something has to be paid for something else has to be cut.
My wife's rural valley elementary school announced on Friday that they're cutting 20% of teacher and who knows how many support staff next year.

That's a not-so-slow motion collapse of our education system.

But at least the finance industry is getting a massive payday. We need to end this grift as soon as possible. It's only going to get worse as private credit stress spreads.

Oregon passed the nation's toughest law protecting patients from private equity in healthcare. Then wrote private equity a check that was at least $290 million.

OR public schools under stress because of Private Equity investment disaster (cont)