CalSTRS Ponders Collaboration for Private Market Investments

California State Teachers’ Retirement System (CalSTRS) Chief Investment Officer Christopher Ailman said that he and investment staff of the $222.5 billion retirement plan have been meeting with other pension plan officials to discuss a collaborative effort to invest in private markets.

Ailman would not name the pension plans, but told the CalSTRS Investment Committee on Wednesday that senior CalSTRS private market officials have been working over the last year with officials of three public pension plans north of CalSTRS headquarters in West Sacramento, California, on a collaborative private markets investment effort. He said one meeting took place as recently as last week.

While Ailman would not name the pension plans, the two largest retirement plans investing in private markets north of CalSTRS are the $76.5 billion Oregon Public Employees Retirement Fund and the $98.9 billion Washington State Investment Board. Prior to joining CalSTRS in 2000, Ailman was the CIO for the Washington State Investment Board.

In a separate development, Ailman said he met last week at the Milken Global Conference in Los Angeles with officials of three global pension plans in separate meetings to discuss private market collaborative investment efforts.

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“I had three side meetings with other CIOs from other large global funds to talk about this exact issue,” he told the investment committee. Ailman would not offer more specifics on his meetings.

The details of potential collaboration between CalSTRS and other pension plans in private market areas such as private equity, real estate, and infrastructure, haven’t been publicly discussed.

CalSTRS documents presented to the investment committee at its May 9 meeting indicate that CalSTRS is exploring achieving cost-savings by eliminating or reducing the role of external managers in managing private market investments.

CalSTRS paid $792 million in fees to private market managers in 2016, the last full year in which numbers are available.

CalSTRS has been studying alternative private market investment options over the last year. Virtually all of its private market investments now involve some type partnership with an external investment manager.

Ailman has said that reducing costs is key particularly because his investment staff and consultants have projected a lower return environment in the next decade. CalSTRS has approximately $18 billion invested in private equity, $26 billion in real estate, and $1.5 billion in infrastructure investments.

Like many public pension plans, CalSTRS is underfunded, with a funding ratio around 64%.

Ailman said investment staff will explore over the next fiscal year starting July 1, “what are the challenges, roadblocks, and opportunities” in regard to collaborative investing.

“Each step along the way, the [investment committee] will have the opportunity to say, ‘are we ready to go there, do we like that idea, or do we want to scale that back,’” he said.

Tags: CalSTRS, Chris Ailman, Milken Institute Global Conference, Pension, Private Markets

The $10.9 billion University of Michigan endowment has responded to news reports citing potential conflicts of interest at the foundation, including allegations that as much as $4 billion of the endowment is invested in funds whose executives are major donors to the university.

According to the Detroit Free Press, investment firm executives donated hundreds of millions of dollars to the University of Michigan, while the university invested as much as $4 billion in those companies’ funds. The newspaper also said that more than $400 million of that amount was sent into funds managed by three alumni who advise the university on its investments.

Reports from the Free Press also suggested that the university attempted to bury an internal audit report that found problems with the endowment’s management dating back to 2014, including “a lack of proper oversight,” and employees accepting luxury gifts and high-end travel from fund managers. The newspaper also said auditors questioned business-class flights for staff, as well as outside work done by the university’s CIO.

“The Detroit Free Press has raised a number of questions related to the University of Michigan Investment Office,” said the University of Michigan in a release, which added that several university leaders have given interviews and shared background information in an effort to respond to the questions raised about conflicts of interest.

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“Free Press reporters obtained a copy of very preliminary observations made by the University Audits team in 2014,” said the university. “This preliminary work was never completed, after it was determined that University Audits did not have the expertise to review the institution’s investment activities.”

In its defense, the university said there have been five external audits of university finances since 2014, and “none has found any concerns with investment operations.”

It also said that “many of the initial observations” made in the audits in 2014 were misunderstandings or inaccurate.

“The preliminary observations from University Audits represent the very early work that is part of the normal process,” said the university, which added that it is standard operating procedure that the Office of University Audits shares some initial observations and then meets with Michigan’s investment office to clarify those observations before proceeding.

“In this case, University Audits decided they did not have the expertise to complete the audit and abandoned this project very early in the process,” said the university. “It would be extremely unfair to report those very early observations. Many of them are not accurate or reflect misunderstandings of investment office processes.”

The university also said that it has hired PricewaterhouseCoopers to conduct a review of investment operations and procedures, the results of which are expected by the end of June. The scope of the review includes an assessment of university-identified business processes, controls, and related transactions in the areas of governance, due diligence, and documentation for investments; authorization and funding of commitments; conflict of interest; and conflict of commitment documentation, including participation on boards and other outside entities and related compensation.

Tags: Endowments, Foundations, PricewaterhouseCoopers, University Audits, University of Michigan