Ah, the good old days, when diversification meant splitting your money between levered instruments (securities), somewhat levered and less liquid assets (like timber and commodities) and extremely levered investments (like private equity).
That kind of diversification didn’t work out so well, when everything collapsed at the same time — those most-leveraged positions got crushed.
Bloomberg compiled the ugly details:
U.S. pension funds contributed to the record $1.2 trillion that private-equity firms raised this decade. Three of the biggest investors, state pensions in California, Oregon and Washington, plunked down at least $53.8 billion. So far, they only have dwindling paper profits and a lot less cash to show the millions of policemen, teachers and other civil servants in their retirement plans.
The California Public Employees’ Retirement System, the Washington State Investment Board and the Oregon Public Employees’ Retirement Fund — among the few pension managers to disclose details of their investments — had recouped just $22.1 billion in cash by the end of 2008 from buyout funds started since 2000, according to data compiled by Bloomberg. That amounts to a shortfall of 59 per cent. In total, they haven’t reaped a paper gain from funds formed in the past seven years.
And this is really what all the controversy about placement agents and pay-to-play exploitation of state pensions is all about. If these investments had just kept sailing on, nobody would have cared. But when you’re staring at a loss on all investments in the last 7 years, someone’s got to pay.
The good news for private equity: these funds need to hit such aggressive numbers going forward that they’re forced to keep making the same bet, hoping the law of mean reversion starts to work back in their favour.
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