Tuesday, July 8, 2008

Public Pension Funds: The Other Real Estate Disaster

From Forbes:

Your state's employee pension fund is probably (a) doing badly with recent real estate pools and (b) working very hard with the private equity operators of these pools to keep you in the dark. By Stephane Fitch

Scott Lawlor and the managers at Pennsylvania Public Schools' $63 billion pension fund had a beautiful relationship. From an office on New York's Park Avenue Lawlor and his firm, Broadway Partners, ran real estate "opportunity funds," fat with capital from the teachers' pension and other institutions. He had invested the funds in a $10 billion pool of glamorous office properties like Boston's John Hancock Tower. Lawlor delivered profits--or so the Pennsylvania fund managers reported--of up to 40% a year. The state fund managers kept capital flowing, both to his funds and to his pocket, in the form of fees.

Everything was private. No Wall Street analysts, no regulators, no outsiders and no interference. No ordinary Pennsylvania pensioner got to see Lawlor's quarterly financial reports. The managers in their pension plan's Harrisburg headquarters had all signed nondisclosure agreements with Lawlor....MUCH MORE

HT: The Columbia Journalism Review who write:

Forbes Lets ‘Er Rip
Hard-hitting piece says pension funds help cover up investment returns

Forbescover story this week is a tough indictment of the private-equity real estate business—and the pension funds that supply their so-called opportunity funds with much of their investment capital. It’s rare to see such a scathing takedown in the business press.

The magazine’s Stephane Fitch does a good job of peeling back the protective covering that’s been applied by the industry and shows that its returns are typically not worth what investors are paying for them. But even more interesting is how government pension funds are collaborating—in what Forbes calls “an epidemic of self-censorship” and “a legally sanctioned cover-up”—with private-equity to keep their investment returns hidden from the public....