Oregon PERS Gambles on Venture Capital with Kids Emergency Fund Assets

On November 14, 2007 Nigel Jaquiss of The Willamette week, pictured above on left, wrote a story titled “Gambling with Kids Future.” Jaquiss recently won the Pulitzer Prize for investigative journalism, a remarkable achievement for a local weekly publication. Pictured on right are Ron Schmitz, PERS Chief Investment Officer, and Jay Fewel, Portfolio Manager. Schmitz and Fewel have ridden the private equity wave to solid returns with big investments in KKR and TPG, among others, even though these investments are mostly illiquid and are valued by the private equity firms themselves. Publications like Plan Sponsor that heavily pander to hedge and private equity funds and, well, obscene fees, didn’t miss the opportunity.

What makes the venture capital investments unsusual is that Venture Capital, which account for 25 percent of the emergency fund, can be illiquid for long periods of time.

Oregon indeed does need to plan more carefully with respect to education, not only investment strategies yet also a more stable funding base given that the source of this “emergency fund’s” assets is lottery proceeds.

While Oregon parents are increasingly concerned about kids becoming addicted to dangerous drugs, their drug of choice for funding thier children’s basic education is lottery proceeds. Oregon is one of a couple states with no sales tax. Parish & Company supports the creation of a schools specific sales tax provided such proceeds go directly to schools, including higher education.

In Oregon this debate over the lottery and related casino gambling is now controlled by lobbyists representing Indian casino interests, most notably Len Bergstein on the Democratic side.

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Enron Style Train Wreck? Oregon PERS, SEC, DeFazio, Fortress, Railamerica

Just as Enron manipulated the power grid to create artificial profits, a private equity firm, Fortress, is now attempting the same game with key railroad infrastructure in the State of Oregon, and using Oregon Public Pension assets to do it. Oregon PERS invested an additional $125 million in Fortress in May 2007 (select May 2007 minutes), on top of $425 million already invested. Here are the details.

In a November 15, 2007 AP story involving RailAmerica U.S. Rep. Peter DeFazio, D-Ore., pictured above, reacted angrily to the company’s suggestion that taxpayer dollars be used to help reopen a short line railroad that runs from Eugene to the Oregon coast. DeFazio said the plan was outrageous, summing it up as “a group of super-rich hedge fund managers who are trying to extort the Port of Coos Bay and the people of Oregon for a few million, which to them (the hedge fund mangers) is chump change.” RailAmerica was purchased by Fortress Investment Management, the firm with which U.S. Presidential Candidate John Edwards has strong ties.

DeFazio said a better option is to force the company to sell the line. With the company’s assertion that the line loses $1.5 million per year, “we could make them pay us to take it,” DeFazio said, or seize the line through eminent domain. “These people clearly are not interested in providing a critical public service,” DeFazio said. “I don’t care how rich they are, how powerful they are. We can beat them.”

What DeFazio does not apparently realize is that the Oregon Public Pension system is a big investor in the private equity firm, Fortress, parent to RailAmerica. Given that state tax receipts are how the public pension system is funded, it seems somewhat ironic that Oregon PERS is investing in a firm that is crippling the competitiveness of key Oregon businesses. A better solution would be for Oregon PERS to purchase the line directly and have it managed by railroad professionals focused upon running a vital service rather than gouging users.

See related blog posts in the Oregon-PERS category.

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Oregon PERS:More Funds to Robert Bass and Nike’s Phil Knight

Today the Oregon Investment Council (OIC) had its October 2007 monthly meeting and made additional committments to private equity, including $325 million to Oak Hill Partners on top of its original $100 million investment made to a partnership in which Robert Bass and Phil Knight are general partners. State Treasurer Randall Edwards, whose wife Julia Brim Edwards is a public communications director at Nike, was not at the meeting and therefore did not vote.

Pictured below is J Randall of Oakhill Partners making his proposal to Ron Schmidt, PERS Chief Investment Officer on left seated next to legal counsel.

Robert Bass right hand man and managing partner, J. Crandall, made the proposal. Crandall noted that his “first LBO was in 1978 and added that its 39 partners were investing a combined $100 million in the new $4 billion fund. He went on to add that this is not simply “recycling fees” but a real committment on the part of partners. Whatever the case, this amount is a fraction of the fees they are earning.

What makes us unique is our focus on “organic growth,” said Crandall, highlighting they they only leverage up firms they buy 3.5 times while the industry average is 5. As if that were not highly leveraged. He added, and so that’s our “secret sauce.” I almost burst out laughing in that it seems that since I started using this expression, secret sauce, to describe their use of NOL’s, they have turned its meaning around.

In attendance at the meeting was the council’s newest member, Keith Larson. Larson works for Intel Capital and when the council approved $75 million for a technology venture fund, Technology Crossover Partners, it seemed rather odd. Here is a top executive of a publicly traded company, Intel, one of Oregon’s largest, who is now one of five voting members on selecting the managers for Oregon’s $70 billion in PERS assets.

Technology Crossover Partners charges a carry fee of 25 percent in addition to a high annual managment fee, resulting in one council member, Harry Demorest, to initially object yet later support the proposal given the difference between the gross and net returns was about half due to the fees.

Pictured below is Scott Larson of Intel Capital, the newest member of the Oregon Investment Council.

The reason Larson’s involvement seemed strange, including his point that allocating a certain amount to this area is important, is that Intel has a very marginal 401K plan and one would think that deploying Mr. Larson to help fix its own retirement plan, in terms of better choices and lower fees, should be Intel’s priority.

The conflicts of interest given Intel capital’s broad reach with respect to investments that intersect with the council is so significant it is not worth mentioning. With so many capable and more experience candidates to serve in this role, it makes no sense for the Governor to add Larson.

Perhaps this again highlights why the Securities and Exchange Commission should have more oversight regarding directors of public pension systems. At a minimum, Intel’s Chief Financial Officer Andy Bryant should give Larson a call and say this is this is not the appropriate place for Larson to apply his talents.

Pictured below is Dick Solomon, OIC Council Chair and a practicing CPA, whose clients businesses intersect with the OIC’s investments.

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SEC Chair Cox called to suspend RiskMetrics IPO due to proxy rule deficiency

Today Parish & Company formally requested the SEC to suspend RiskMetrics IPO due to inadequate disclosure regarding both RiskMetrics and ISS ownership structure. Such disclosure is the heart of proxy rule regulations given proxy firms unique role in the marketplace.

In order to remedy this, RiskMetrics needs to file an ADV with the SEC and fully disclose its ownership structure and other key aspects covered in this standard ADV disclosure. Stating that it is owned by hedge funds or private equity firms is not adequate unless these firms in turn file separate ADV’s with the commission.

Both Gretchen Morgenson and Floyd Norris of the New York Times are copied on the following correspondence to the commission. More details are available on my blog at billparish.wordpress.com including October 10, 2007 blog post titled “Hedge funds Secret Sauce Going Public via RiskMetrics IPO.”

October 2, 2007

Dear Chairman Cox,

Please do suspend the RiskMetrics IPO until such time it files a completed ADV disclosure both for itself and owners and control persons as defined by the commission who are private equity or hedge funds not currently filing separate ADV’s.

This is a clear and dramatic violation of the essence of proxy regulations by the leading proxy firm itself. RiskMetrics business is the modeling and creation of derivatives, which has played a key role in the current controversy regarding the mortgage markets.

The right decision is to require RiskMetrics to sell ISS to a more appropriate owner, for example a large public pension, as was done with Glass Lewis, or a private firm without the internal conflicts of interest that undermine the quality of proxy services, i.e. structuring derivative products for hedge funds. Failure to do so may indeed repeat some of the tough lessons learned from the accounting industry, in my opinion.

Much appreciated.

Sincerely,

Bill Parish

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Nike’s Phil Knight Gives UO $100M

In his recent $100 gift to the University of Oregon, Phil Knight stipulated that the gift was to cover operating expenses and not be used for constructing a new athletic facility. True to his accounting roots, Knight understands the importance of funding operating costs, rather than funding a building that has no operating budget. It was a brilliant forward thinking gesture.

Two aspects pertaining to the October 9, 2007 story in the Oregonian not discussed were Knight’s bitter conflict with the City of Beaverton’s attempt to annex Nike’s corporate campus and secondly Knight’s partnership with Robert Bass that received $100 in public pension assets (PERS) retirement funds to manage.

The conflict with the City of Beaverton resulted in a prolonged legal action by Nike and the ultimate search of City of Beaverton employees home and work computers regarding any reference to this annexation effort. To most observers this effort by Nike seemed extreme. It was led by Julia Brim Edwards, former Chair of the Portland Public Schools, whose husband is the sitting State Treasurer Randall Edwards.

Ironically, Edwards voted in the Spring of 2005 to give this private equity partnership in which Phil Knight and Robert Bass are the sole general partners $100 million of PERS funds to manage. At the same time Nike was bitterly fighting increased taxes to cover city services that would have resulted from annexation, taxes for which a large percent of would go to pay public employees, most notably teachers and police officers, future retirement costs.

If you are Phil Knight and in Oregon, you clearly have it your way, especially at the Oregonian who dared not discuss his receiving the PERS funds at the height of the conflict with the City of Beaverton. In addition, there has never been an article in the Oregonian discussing Knight’s investments.

To Knight’s credit, he has made terrific gifts to athletics at the University of Oregon. Perhaps some day he will also endow pure academics, for example language and literature programs.

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Kulongowski Endorses Westlund for State Treasurer

Yesterday Ben Westlund announced he would run for State Treasurer as a Democrat. He had previously briefly run for Governor as an independent in 2006 against Governor Ted Kulongoski and before that was campaign manager for a Republican, Kevin Mannix, who ran and lost against Kulongoski in 2002.

Westlund eventually withdrew from the Governor’s race on August 10th, 2006, paving the way for Kulongoski’s victory by not siphoning off Democratic votes. Kulongoski now enthusiastically endorsed Westlund on the day he announced his candidacy for State Treasurer. Clearly, many wonder if a deal was struck when Westlund cut short his run for Governor.

A few questions Oregonians, both taxpayers and PERS participants, might ask include the following:

1) Will Westlund help reign in PERS aggressive moves into hedge and private equity funds and support a more balanced strategy than the current allocation of 73 percent stock and real estate and only 27 percent fixed income.

2) Will he fix the college savings plan by removing Oppenheimer (a plan set up by the current Treasurer Randall Edwards designed to please the investment industry) and add a more parent centric choice such as Vanguard as the primary vendor.

3) Will he raise serious conflict of interest issues involving the current Chairman of the Oregon Investment Council (OIC) Dick Solomon, a practicing CPA whose clients interests with OIC business, in addition to support rules requiring that lobbyists representing firms who seek funding before the council identify themselves. Sadly, Oregon PERS has become a cookie jar for the investment industry and if more difficult market conditions emerge, PERS participants may once again have to take large benefit cuts due to the overly agressive management of this $7o billion fund. Especially given the aggressive accounting practices employed by many of the private equity firms it has invested in, including KKR and the Texas Pacific Group.

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OIC Awards $1.2 B, Solomon Discloses Conflict, Leon Black Presents, Westlund Treasurer Candidate

Yesterday the OIC met and awarded $1.2 billion in investment contracts. The meeting included a presentation from Leon Black (Pictured below) who is personaly worth $4-5 billion. Dick Solomon and Katy Durant both disclosed conflicts of interest, former OIC Chair Gerard Drummond was in attendance as was expected candidate for State Treasurer Ben Westlund. This was Westlund’s first OIC meeting. Here are my unofficial 9/27.07 OIC meeting minutes.  See OIC Commissioners below, left to right they chair Dick Solomon, State Treasurer Randall Edwards, Katy Durant and Harry Demorest, former managing partner of the Portland Arthur Andersen office.  Not pictured is Mark Gardiner, whose final meeting on the council was today.

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Union Chief Under Fire for Wrong Reasons

Today the Oregonian ran a story by reporter Jeff Mapes about SEIU President Joe DiNicola, Mapes noted that:

“The largest union for state employees in Oregon is embroiled in a messy political and legal struggle over a claim from its elected president for nearly $110,000 in back overtime pay. Outraged members of Local 503 of the Services Employees International Union, including several board members, launched a recall campaign against the president, Joe DiNicola. In turn, DiNicola is seeking a court order charging that union and government resources are being used to aid the recall, which SEIU denies. He also has filed a civil rights complaint charging he has been discriminated against for making his wage claim.”

Rather than engage in a conflict my advice would be for SEIU to cut the check for $110,000 with the stipulation that DiNicola advance two initiatives.

The first would be a natural for him, a tax auditor, and that would be to raise a discussion regarding the most abusive corporate tax loophole in 25 years, one that has both decimated union ranks through non sensical mergers and also short changed investors alike. Steve Duin referred to this tax loophole in an opinion piece and I also wrote about it in an article titled the “Amazing Carry and Tax Loophole Inside PERS” or Brainstorm NW magazine. If DiNicola is successful in closing this loophole the union could theoretically justify writing him a check for every dime it has and kissing his feet in gratitude because the net impact would be the preservation of millions of good jobs, a disproportionate share being union jobs.

The second recommendation to SEIU would be to encourage DiNicola to be more aggressive in representing issues key to domestic job growth at meetings of the Oregon Investment Council. This was not mentioned in the article by Mapes yet perhaps DiNicola’s most important activity of all is attending the monthly OIC meetings on behalf of SEIU, where the $70 billion of PERS investments gets awarded to various managers.

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OIC Hosts NW Natural CEO Mark Dodson

In June the Oregon Investment Council held its annual planning session and included a special presentaiton from NW Natural CEO Mark Dodson on Carbon limits and other energy topics. This is the same Mark Dodson whose firm NW Natural tried to acquire PGE with funding from the Texas Pacific Group. In addition, the law firm at which Dodson was managing partner prior to joining NW Natural, Atre Wynne, shared office space with Neil Goldschmidt and his partner Tom Imeson and did most of the legal work in Texas Pacific’s separate later attempt to acquire PGE a second time.

The June 27, 2007 meeting minutes also note that a key topic was “socially responsible investment” and “sustainability” issues.

It was not disclosed whether OIC Chairman Solomon, a practicing CPA, does tax work for Dodson or any other executives at NW Natural. What is known is that NW Natural and Warren Buffett’s Pacific Power have expended considerably time and energy in trying to upend a law that prevents utilities from charging ratepayers for taxes that they do not ultimately remit to the various taxing authorities. In addition, Dodson and Buffett tried to unseat Senator Vicky Walker form Eugene even though the legislation she sponsored was widely praised as an outstanding reform to the system.

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Oregon Investment Council (PERS): Private Equity Investments

Here is a link to the history of private equity investments by Oregon PERS going back to 1981. The listing shows that more than $5 billion in new committments have been made to the private equity area in the last 18 months. KKR alone has received more than $2.5 billion in the last 3 years.

Although the historical returns looks good, it is hard to tell the real actual returns since the summary does not account for the time value of money given that some of the returns occurred 25 years ago, etc. In addition, private equity firms value the companies they own themselves since they are not publicly traded. Previously the OIC showed the total current outstanding balance of private equity on its quarterly spreadsheet yet this amount is now part of the overall OPERF total and not broken out separately. See quarterly excel spreadsheet summarizing portfolio.

One thing is clear and that is that a significant increase in private equity investments has occurred recently. In May of 2006 I wrote the following article titled PERS-The Amazing Carry Fee and Tax Loophole for Brainstorm NW summarizing the growth and related fees associated with these investments.

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