If there's not enough bad news in the private equity industry these days, consider this: Imagine if the two largest U.S. pension funds, the California Public Employees' Retirement System and the California State Teachers' Retirement System, exited the business. That could happen if the obscure Responsible Private Equity Investment Act of 2008 bill (
AB 1967) becomes California law.
Continue reading below
AB 1967 would restrict the two big state pension funds from investing in private equity funds that have sold stakes to sovereign wealth funds. While the bill doesn't formally outlaw involvement with SWFs, it establishes a battery of tests that most would almost certainly fail. For example, the fund's parent country would have to be a signatory of five of the United Nation's six human rights treaties. If the sponsor country passes the first test, it may be tripped up in the next round.
In response to the proposed legislation, CalSTRS has said it would have to cease investing in private equity, its best-performing asset class, notes an Investment Dealer's Digest story. CalPERS hasn't formally commented on the law, which is co-sponsored by Service Employees Union International, a union that has been a vehement critic of private equity, organizing protests against high-profile firms such as Carlyle Group.
While only a few private equity firms have sold stakes in their general partnerships to SWFs, they are top tier: Apollo Management LP, Blackstone Group LP and Carlyle. The IDD story cites a study from the Pension Consulting Alliance that argues that most top-tier firms will eventually follow their leads.
However, what's less well known is whether the legislation has any reasonable chance of passing. If it means anything, the bill has only been mentioned in trade publications like IDD, and not the wider press. And although AB 1967 has only one sponsor in the legislature, Democrat Alberto Torrico, it's worth noting that he has served as an assistant majority whip, meaning he knows a thing or two about shepherding bills and legislatures to vote. If by chance it did win approval in California, the SEIU would almost certainly take it on the road to other states.
This isn't the first time that California's two big pension funds have been buffeted by political initiatives coming out of Sacramento, particularly demands to invest more locally. But time and again, the need for the two funds to maximize their returns by spreading their billions widely has trumped the parochial concerns of state politicians or special interests. That'll probably happen here, but the struggle is never pleasant. - Matthew Wurtzel
See the text of AB 1967
See white paper from Nixon Peabody
See story from Investment Dealer's Digest
See related story about Carlyle from TheDeal.com
See related story about sovereign wealth funds from The Deal newsweekly
