In February, California Assemblyman Alberto Torrico introduced AB 1967, a bill that would bar the state's pensions from making new, additional and or renew existing investment with private equity firms if they have sovereign wealth fund (SWF) stakeholders associated with countries that haven't signed at least five of six international human rights treaties. California State Teachers' Retirement System (CalSTRS) has subsequently denounced the bill, due to hit the governor's desk by August.
If passed, the bill would alter or end CalSTRS' and the California Public Employees Retirement System's (CalPERS) relationship with the several major private equity firms that have sold management stakes to entities affiliated with nations in the Middle East and Asia, including the Carlyle Group and Apollo Management.
In an interview with sister news service PrivateEquityOnline, Torrico said he was particularly concerned with funds associated with the United Arab Emirates. ?They haven't signed on to a number of [international human rights] treaties, there's tremendous documentation regarding civil rights and human rights violations,? said Torrico. ?It just doesn't seem like we should be investing public funds to support those kinds of regimes.? The current bill does not include language addressing SWF investments in publicly listed investment vehicles, like Blackstone.
The bill has already earned the ire of CalSTRS, which voted to oppose the legislation due to negative fiscal impact and restriction of the board's investment authority at a recent investment committee meeting. CalPERS is slated to discuss the legislation on March 17th; a spokeswoman told PrivateEquityOnline that staff is still analyzing the bill's potential impacts. Industry group the Private Equity Council has said they are opposing the bill.
?This bill would be a blow to the retirement security of teachers while doing nothing to ensure a better world,? said Dana Dillon, Cal- STRS' board chair and a California schoolteacher/librarian, said in a statement. ?We have a strong record of addressing these issues in our investment decisions. Our geopolitical risk policy is the first of its kind among US pensions. AB 1967 may be well intentioned, but is a dead wrong solution,? said Dillon.
CalSTRS estimates that bill would force them to forego $1.5 billion in revenue over the next five years just from divesting their stakes with Carlyle and Apollo, both of which are partially owned by Abu Dhabi-related vehicles which fall under the ban. If other private equity firms sell stakes to targeted SWFs, estimates rise to as high as $5.3 billion.
Torrico responded to such criticism by citing their bans on investments involving Darfur or apartheid-era South Africa that failed to hamper returns. ?The staff was directed to make investments into socially responsible funds and there was an outcry about how those would lose money and then after 3 to 5 years of investing in those funds, guess who were the highest-yielding funds? The socially responsible ones,? said Torrico.
The bill comes just as the US Congress launched a task force to examine the national security and political fears surrounding SWFs. David Denison, the CEO of the Canadian Pension Plan Investment Board told the task force to look ?beyond the labels? and realize the importance of SWFs in the US economy. Denison expressed concerns that SWF legislation may impact his fund since it was launched by the government.
A recent editorial from The Wall Street Journal criticizing anti-SWF rhetoric cites a staff memo from CalPERS that reports restrictions on investing in developing nations have cost the fund approximately $410 million, equal to 2.6 percentage points in returns. Last October, California's governor signed legislation that required CalPERS and CalSTRS to divest $3.4 billion of stock in companies doing business in Iran.
?We can't eliminate the portfolio's best performers by banishing the top-tier private equity firms,? Jack Ehnes, CalSTRS chief executive, said in a statement. ?This bill ignores the realities of the global financial marketplace where sovereign wealth funds are passive investors in a growing number of the most attractive investment opportunities in the world.?