That wouldn't be a problem for anyone except the investors but for the fact that in the case of the public employee pensions the taxpayer is on the hook for any shortfall or costs incurred by pension fund contortions to stay liquid enough to pay current retirees. We saw exactly this behavior in October 2008:
"Calpers Sells Stock Amid Rout to Raise Cash for Obligations":
This is hedge fund behavior, selling your most liquid investments to prop up the illiquid....
And from the Wall Street Journal, June 15:
Retirement funds seek cash while money languishes in zombie investments
Private-equity and pension funds seemed like a match made in heaven. U.S. companies and states handed over control of some worker retirement savings. In exchange, they got a promise of high returns after a decade—and often received healthy cash payouts in the years before that.
Now the honeymoon is over. The payouts have dried up, creating an expensive problem for investment managers overseeing the savings of workers retired from big corporations and state and city governments.
To keep benefit checks coming on time, those managers are unloading investments on the cheap or turning to borrowing—costly measures that eat into returns. California’s worker pension, the nation’s largest, will be paying more money into its private-equity portfolio than it receives from those investments for eight years in a row. The engine maker Cummins took a 4.4% loss in its U.K. pension last year, in large part because it sold private assets at a discount.
It is the latest cash crunch to befall retirement funds that have piled into hard-to-sell investments in search of high returns, and spotlights the risks as Wall Street is trying to sell those investments to wealthy households.
“You’ve got a lot more money out and going out than is coming back, and I think that’s causing a lot of angst,” said Allen Waldrop, Alaska Permanent Fund Corp. private-equity director.
U.S. companies and state and local governments manage around $5 trillion in pension money. Large public pension funds have an average 14% of their assets in private equity, while large corporate pensions have almost 13% in private equity and other illiquid assets such as private loans and infrastructure, according to data from Boston College and JPMorgan Chase. Much of the money was committed when low bond yields were dragging down retirement portfolios.
But as private equity has grown, its lead over traditional stocks has narrowed. And during the decade before the investments pay out, it can be hard to trust interim estimates provided by fee-seeking managers.
Pensions, sovereign-wealth funds, university endowments and other institutions often promise their money to private-equity managers for a decade or so. Over that time, the managers draw down the cash and use it to buy companies, then overhaul and sell them. Those sales and the resulting cash distributions to investors have slowed markedly as high interest rates have made buying and owning companies more complicated and expensive.
Unable to sell without denting returns, private-equity managers are keeping workers’ retirement savings locked up for longer—sometimes past the promised maturity date. Nearly half of private-equity investors surveyed by the investment firm Coller Capital earlier this year said they had money tied up in so-called zombie funds—private-equity funds that didn’t pay out on the expected timetable, leaving investors in limbo.
So pension funds are selling private-equity fund stakes secondhand—often taking a financial hit in the process. Secondary-market buyers last year paid an average of 85% of the value the assets were assigned three to six months before the sale, according to Jefferies Financial Group. Secondhand sales by private-equity investors increased 7% to $60 billion last year....
....MUCH MORE
One of the reasons we read books
is so we can learn from the mistakes of other's avoid making those
mistakes, and get on with making mistakes of our own.
Here's the key takeaway from the insolvency of venerable and giant
Krupp, brought low by what was in effect maturity transformation:
because it destroys the very existence of a firm"
-William Manchester, The Arms of Krupp
The family dynasty had a pretty good run, 1587 to 1968, for a while becoming the largest company in Europe before needing to be bailed out which required the fam to relinquish control.
Manchester's book is something like a half-million words long but it's those 18 in the quote above that really hit a nerve.
From an August 2007 post just after the quant-quake:
Liquidity in Business and Markets
I don't remember if it was Johannes or Ernst, it was a long time ago that I read Manchester, quoting one of the Schroeder boys on the insolvency of Krupp. That line has stuck with me. Here's the book.
Except when the "firm" is a pension fund backstopped by taxpayers who, having no say in the liquidity mismatches are just chumps to be fleeced should the schemes of the fund managers fail to hit the required actuarial return profiles.
