Secret CalPERS Meeting on CIO Meng’s Exit Sparks Legal Fight

Neil Weinberg of Bloomberg reports on how a secret CalPERS meeting on the exit of former CIO Ben Meng has sparked a legal fight:

A confidential Calpers board meeting on chief investment officer Ben Meng’s abrupt departure is the subject of an intensifying legal fight between the nation’s largest public pension fund and a former director.

Joseph John “J.J.” Jelincic sued the California Public Employees’ Retirement System earlier this month for transcripts and minutes of what he said was an improperly closed meeting held soon after Meng’s Aug. 5 resignation in the face of an alleged conflict of interest involving a Blackstone Group Inc. investment. Jelincic, a former investment officer who retired in 2019, served on the Calpers board from 2010 to 2018.

Though Calpers has not yet responded to the suit in court, a lawyer for the pension fund sent Jelincic a March 17 letter urging him to immediately withdraw his complaint “to mitigate the potential harm” done by him and an unnamed director who provided him with information about the Aug. 17 board meeting.

“Calpers will investigate and take appropriate action with respect to Mr. Jelincic and his source’s improper actions,” the lawyer, Ragesh Tangri, said in the letter, which was reviewed by Bloomberg.

Meng’s resignation came four months after a Calpers compliance team found he approved the Blackstone investment while personally owning shares in the private equity giant. His exit shook the pension fund, which manages nearly $450 billion and has frequently advocated for corporate governance reforms. Both Calpers Chief Executive Officer Marcie Frost and California state controller and Calpers board member Betty Yee have promised to implement oversight reforms, including possibly requiring the next CIO to divest personal holdings.

Board Secrecy

But Jelincic says the board’s secrecy about the August meeting shows it’s not committed to transparency about what happened. “The issue in this case, quite frankly, is that Calpers continues to hide information from the public and beneficiaries that should be made public,” he said in an interview.

Jelincic filed his lawsuit alleging Calpers violated the state’s open-meetings law after the pension fund’s legal staff rejected his information request. Though California law permits public agencies to discuss personnel matters in closed session, Jelincic claims Calpers is trying to use that exemption to avoid public scrutiny of a far broader discussion about Meng’s departure.

In his March 8 suit, Jelincic cited “a board member’s record” of the meeting in saying 55 topics were discussed, most of which “had nothing to do with personnel matters.” Instead, directors spent a “substantial portion” of the closed session discussing issues including the need for policies governing internal investigations, when the board should be informed of “serious issues,” and compliance matters. The board also discussed media coverage of Calpers, characterizing some of it as “gotcha articles,” the suit says.

According to Calpers though, the main issue is that Jelincic learned details of the meeting from an attendee. In his letter, Tangri said Jelincic should at least have redacted information about the meeting topics from his complaint.

“The plaintiff’s lawsuit states that a Calpers board member provided Jelincic with confidential information from a closed session meeting of the Calpers board,” said pension fund spokesman Wayne Davis. “That’s a clear violation of the law, and we are obligated as fiduciaries to investigate the matter.”

Trouble at Calpers: Abrupt Exit Hits $400 Billion State Fund

In a written response to Tangri reviewed by Bloomberg, Michael Risher, an attorney for Jelincic, said the confidentiality law doesn’t protect “matters that go beyond what is properly discussed” out of public view.“It seems that Calpers is attempting to turn the tables on those who pointed out it violated the law,” Risher said in an interview. “The fact that these topics were discussed in closed session might be embarrassing but it’s hard to imagine how this revelation could adversely affect legitimate interests.”Although the Calpers CIO is among the state’s highest-paid employees, the pension fund has churned through nine different individuals over the past two decades, with Meng serving less than two years. Calpers has delayed hiring Meng’s replacement due to the need to further clarify the pay and incentive structure and the reluctance of candidates to move during the Covid-19 pandemic, Frost said in a statement last week.

Meng’s personal investment in Blackstone was valued at less than $70,000, and Frost said in August that she believed the violation was unintentional. Meng had had a turbulent tenure even before then, with Calpers reporting an underwhelming 4.7% return during his first year as CIO.

A Chinese-born naturalized U.S. citizen, Meng had also faced suspicions about his allegiance from Republican politicians and conservative commentators because of a previous stint as deputy CIO at China’s State Administration of Foreign Exchange. Stephen Schwarzman was among the Wall Street figures who came to Meng’s defense. “This type of attack on an accomplished American citizen is unwarranted,” the Blackstone CEO said last year.

I agree with Stephen Schwarzman, the way Ben Meng was treated was absolutely despicable, and it might be one of many reasons why CalPERS is having a tough time finding a suitable successor.

Of course, CalPERS CEO Marcie Frost is stating publicly that it has delayed hiring Meng’s replacement due to the need to further clarify the pay and incentive structure and the reluctance of candidates to move during the Covid-19 pandemic, which makes sense.

As far as CalPERS secret board meeting, boards have closed door sessions all the time to discuss personnel and other private matters but given the "abrupt nature" of Ben Meng's departure, I too would have liked to be a fly on the wall to listen to what was discussed.

Alas, we will not find out, just like we will never find out the true story behind Mark Marchin's abrupt departure from CPP Investments.

I have heard plenty from very senior people who told me Mark Machin had very legitimate reasons to receive a COVID-19 vaccination while on a "very personal" trip to Dubai, but all that is history now, it's time to turn the page and move forward.

The same with Ben Meng. I've openly stated he was mistreated and CalPERS will have a very hard time finding a better CIO.

They will, eventually, but Ben Meng was heading in the right direction and his departure set America's largest pension fund back.

For example, Preeti Singh of the Wall Street Journal reports that Calpers steps back from four pillars strategy:

United States’ largest public pension system seems to be stepping back from an ambitious overhaul of its private equity strategy outlined several years ago, even as it plows more capital into the asset class.

In 2020, the $445bn California Public Employees’ Retirement System committed $18bn to private equity, more than 2½ times the $6.9bn it committed to the asset class in 2019, according to a report presented to the pension by its private equity consultant Meketa Investment Group. Almost 30% of the money went to co-investments and separately managed accounts, strategies of current focus, which Calpers expects will help it better manage costs associated with the portfolio, according to spokesman Wayne Davis.

Calpers has stepped back, at least for now, from an ambitious investment strategy developed several years ago by former chief investment officer Ted Eliopoulos, who left the fund in 2018, people familiar with the matter said. The “four pillars” strategy was expected to help Calpers deploy an additional $20bn into private equity to reach an 8% target allocation to the asset class and generate gains that would better help the pension fund meet a 7% actuarial rate of return. As of 31 December, private equity represented 7% of the total pension portfolio, pension documents show.

Over the past year, and especially since Eliopoulos’s successor, Ben Meng, resigned from Calpers in December, the pension fund has played down the “pillars” strategy even though private equity remains a core component of its investment portfolio, the people said.

Calpers originally unveiled the four pillars investment strategy back in 2018. Two of the four pillars were separate direct investment strategies that would receive a large portion of the additional $20bn that would go to private equity. One strategy, dubbed “Innovation,” would target direct investments in late-stage life sciences, technology and healthcare companies, while the other, called “Horizon,” would back established business in core sectors of the economy. The other two pillars built on existing strategies of committing capital to fund investments, co-investments, separate accounts and emerging managers.

The ambitious plan required an overhaul in governance and oversight structures that, despite several rounds of presentations by investment staff and initial approval in concept by Calpers’s board of trustees, never really progressed, the people said. The departures of both Eliopoulos and Meng left fewer advocates for the strategies, the people added.

“There is precious little upside in being too adventurous right now,” one of the people said.

Davis said that although the two direct investment strategies remain in the Calpers “investment toolbox,” the pension is currently focused on strengthening other parts of the private equity portfolio.

Calpers pledged some $5.2bn to co-investment deals and separately managed accounts during the second half of last year alone, the pension’s performance report shows. The largest commitment of $1.5bn went to a separate account managed by LongRange Capital, a midmarket private equity firm launched in 2019 by Robert Berlin, a former managing director at Boston-based investment firm The Baupost Group.

The pension system has recruited senior leadership in recent years that will help move its private equity program forward, the people said. Greg Ruiz has led the team for almost two years as managing investment director of Calpers’s private equity program, and last year the fund brought on Yup Kim as head of investments for private equity.

“The duo brings a lot of fresh energy to the private equity investment program,” one of the people said.

Sounds like CalPERS is focusing on increasing its co-investments, which it needs to do to lower fee drag and maintain a healthy allocation to PE, but the four pillars strategy made sense, as long as they got the governance right. 

Still, Greg Ruiz and Yup Kim are doing a great job in private equity and if they can, I'd like to see them increase co-investments to 50% (very tough without the requisite staff to analyze co-investment deals).

But CalPERS did pledge $5.2bn to co-investment deals and separately managed accounts during the second half of last year alone, and that is definitely a step in the right direction, one that both Ted Eliopoulos and Ben Meng were arguing for.

Lastly, the search for the next CIO continues.

Arleen Jacobius of Pensions & Investments reports that CalPERS whittles CIO pool to 3 before calling off search:

CalPERS had whittled the number of finalists for its next CIO to three, but announced Friday that it has suspended the search without making an offer and will pick it back up in June.

Officials at the $439.5 billion pension fund plan to revisit the criteria for the job as well as the search process in April, Ms. Frost said in an interview Friday.

The search was triggered by the August resignation of former CIO Yu “Ben” Meng, in the wake of disclosure filings showing he had invested in shares of private equity managers with which the California Public Employees’ Retirement System, Sacramento, had invested in the past.

Ms. Frost said a 10-member subcommittee that included herself had interviewed eight candidates and trimmed the list to three finalists. Originally, the search process, which began in October, was scheduled to recommend a candidate by January or February.

The subcommittee last met March 15 and decided to halt the search, in part, due to the global pandemic and a lack of clarity on whether the new CIO would participate in a long-term incentive program, Ms. Frost said.

Although the subcommittee had a pool of qualified candidates to consider it did not end up making an offer to any of them, she said.

“The ongoing challenge we often have in recruiting is because of the complex nature of our portfolio,’’ she said. “And it’s a very public environment ... That is a challenge in recruiting. There is not anything we can do with that.”

The three finalists are eligible to reapply, a spokesman said.

Currently, the CIO does not participate in CalPERS’ long-term incentive program. A board committee in April is scheduled to consider whether to change that program and add the CIO to it. Candidates asked about the long-term incentive plan during interviews, Ms. Frost said.

The board’s former compensation consultant Grant Thornton recommended late last year that the CIO participate in the long-term incentive program, but a board committee wanted more information, a committee meeting transcript shows. CalPERS has since replaced Grant Thornton with Global Governance Advisors, which signed its new contract in December.

Ms. Frost said the board decided to wait on making a decision about the long-term incentive program until it heard its new consultant’s opinion and wanted more information about what other institutions are doing regarding long-term incentives.

In addition to the challenge of recruiting an executive with experience investing a large and complex portfolio in a public environment, the CIO needs to be able to retain the confidence of all the stakeholders, including the beneficiaries, she said.

Ms. Frost said she and the board expect to relaunch the search in June.

In the meantime, Ms. Frost said that the full board at its April 19-20 meeting will also be asked to validate the current criteria in place used to assess candidates, which includes being an experienced and respected institutional investment professional with knowledge of managing investments in-house and through external managers.

The individual’s expertise in investing growth assets is going to be “a very important consideration” due to the challenge of attaining CalPERS’ 7% expected rate of return, Ms. Frost said. CalPERS reported a net return of 12.4% for 2020.

“There’s not a large group of candidates that would meet all the criteria,” she said.

Ms. Frost added that internal candidates could also be considered for the CIO role.

Also at the April meeting, the board is expected to decide whether it will keep the same search process. The current process involved two panels of three board members, which came together in a joint subcommittee to vet potential candidates. The board is expected to decide whether the search should be conducted by its seven-member performance, compensation and talent management committee.

My thoughts? I agree with Grant Thornton, the CIO needs to participate in CalPERS’ long-term incentive program. The board needs to approve this in April and it's mind-boggling to me as to why this wasn't a standard part of compensation for all senior staff (get the compensation right!!).

 

Second, and to be very fair here, I agree with CalPERS CEO Marcie Frost: “There’s not a large group of candidates that would meet all the criteria.” 

 

Being CIO of CalPERS is unlike any other job in the pension industry, you really need to have it all and that includes having the full confidence of beneficiaries.

 

So while part of me wants CalPERS to get on with it and find their next CIO, another part of me thinks they really need to take their time and make the right move here, there's too much on the line for everyone involved.

Below, Elizabeth Burton, CIO of the Hawaii Employees’ Retirement System, joins “Squawk on the Street” to discuss the markets and economic outlook.This aired back in June, just posting it now as her comments are interesting and she definitely should make the short list (although going Long Sacramento/ Short Hawaii is a tough trade for anyone). 

 

And Bridgewater Co-Chairman and Co-CIO Ray Dalio says that the Fed's monetization efforts to hold down rates raises inflationary pressures. He says that in the current environment, "cash is trash." He joins David Westin exclusively on "Bloomberg Wall Street Week."

 

I love Ray but respectfully disagree, inflationary pressures will dissipate next year once the US dollar strengthens this year, global pensions are scooping up bonds on every major yield backup, and cash is definitely not trash now. 

In fact, I've been analyzing many stocks across the risk spectrum over the last 2 days and it looks brutal on the riskiest assets (biotech, solar, EV and other hyper growth stocks) and I'm scared deleveraging will spread to the rest of the market. If you ask me, right now, cash is king and if a full blown bear market develops, it will remain king (more on this Friday).

But Ray is right on monetary inflation being a risk and the importance of diversification, a theme he always believed in (foundations of their All-Weather fund).

Lastly, Mohamed El-Erian, president of Queens' college at Cambridge University and Allianz chief economic advisor, joins Yahoo Finance to discuss the latest Fed decisions, impacts from bond market moves, and inequality due to the pandemic. Great discussion even if I don't agree with him on everything.