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NJ Pension Officials, Citing Better Returns, Defend Alternative Investments

But they agree to address concerns about millions in fees paid to private fund managers

tom byrne
New Jersey State Investment Council Chairman Tom Byrne (center) leading the council's meeting in Trenton.

Armed with new data compiled by an outside consultant, New Jersey pension-system officials pushed back yesterday against criticism of its robust alternative-investment portfolio.

The stakes in private equity, hedge funds and other investment firms produced results that beat the pension system’s assumed rate of return over the last five years, even when fees paid to private fund managers that some have criticized as excessive were accounted for, a report compiled by Aon Hewitt showed.

Still, pension-system officials promised yesterday during lengthy meetings in Trenton that their goals for 2016 would include looking into whether alternative-investment fees can be renegotiated and more of the investment management brought in-house.

The alternative investments have been a source of controversy for the New Jersey State Investment Council for more than a year as the panel, which sets policy for the $71 billion public-employee pension system, has had to deal with state pension contributions from Gov. Chris Christie’s administration that have been far below actuarial estimates.

Helped the bottom line

Financial professionals on the council say the alternative investments have improved the pension system’s balance sheet] through diversification, especially during years when the stock market isn’t performing well. In a period of high market volatility – the pension system was down 3 percent during the first six months of the fiscal year – they say that’s an especially valuable feature.

But others have questioned whether the fees -- which can reach into the hundreds of millions of dollars -- are an appropriate use of public dollars.

The fees totaled $600 million during the 2014 fiscal year, counting performance bonuses and carried interest. And though figures for the 2015 fiscal year, which ended June 30, are still being calculated, New Jersey State AFL-CIO President Charles Wowkanech criticized preliminary estimates that indicate the fees will again be in the hundreds of millions.

“This is an unnecessary and unacceptable use of taxpayer funds,” Wowkanech said.

The alternative investments can also give the state less control over how its assets are being used, exemplified by a controversial stake the state ended up owning in ACE Cash Express, a payday lending firm. The stake was only recently shed after months of working through the complicated structure of the investment, state Division of Investment officials said yesterday. That drew praise from lawmakers and good-government organizations, but also spurred calls for tougher regulations.

“We urge the council to take the next appropriate step of strengthening its due diligence policy to make sure a situation like this does not happen again,” said Beverly Brown Ruggia, a community reinvestment organizer with New Jersey Citizen Action.

Preventing political contributions

State lawmakers, meanwhile, have also begun to propose ways to improve the current rules meant to prevent the private fund managers who handle the pension system’s alternative investments from influencing state leaders through campaign contributions.

Those efforts come as there have been three recent examples -- including a new one disclosed for the first time publicly during the council’s meeting yesterday – of political contributions made by private fund managers or their relatives into campaign or political party accounts in New Jersey in recent years despite prohibitions already on the books.

Still, pension-system officials yesterday defended their overall alternative-investment strategy, pointing to the numbers compiled by Aon Hewitt that showed the investments have produced 9.2 percent net returns over the last five years. That beats the pension system’s assumed rate of return of 7.9 percent, and the overall 7.3 percent rate of return the system experienced during the same five-year period.

Tom Byrne, the council’s chairman, said the focus should always be on “the net return” or “what’s coming in.”

“I think that was a very important presentation,” Byrne said.

But Christopher McDonough, director of the Division of Investment, which oversees the management of the pension system on a daily basis, also outlined goals for the agency for 2016 that included a review of alternative-investment fees that could be renegotiated down. Exploring whether some asset management could be brought back within the 65-employee division is another goal, he said.

“We recognize the importance of minimizing fees and costs,” McDonough said. “We’re looking at lower-cost strategies.”

Stake in payday lending dropped

He also detailed how the pension system was able to shed its decade-old stake in JLL Partners, the owner of Texas-based ACE Cash Express. Even though the practice of payday lending is illegal in New Jersey, it took nearly a year for the pension system to get rid of the investment once it was flagged as a concern.

The stake was sold on December 31, McDonough said, with the state taking 1.6 times its original $50 million investment, or about $86 million.

“I’m glad the State Investment Council took this issue seriously and made the right decision,” said Assemblyman Troy Singleton (D-Burlington), who last year called on the state to get rid of the investment as soon as possible, citing millions in fines and restitution assessed against ACE by federal regulators in 2014.

Also announced during the meetings yesterday was a new violation of council regulations that are designed to prevent political interference in its investment decisions. Private fund managers and their firms are prohibited from making political contributions to candidates and political parties in New Jersey, with immediate contract termination the typical penalty for any violations.

But the council also has the power to grant an exemption, which it did yesterday after learning about the circumstances of a contribution that was made in May to two Democratic Assembly candidates who ran unsuccessfully last year in the state’s 40th Legislative District.

CVC Capital Partners, a private-equity firm the pension system purchased a stake in more than two years ago, self-reported to the council that a $5,200 check was contributed to the candidates by the wife of one of the firm’s investment managers. The contribution was later reimbursed by the candidates.

Adam Liebtag, the investment council’s vice chairman, said there were “sufficient reasons” to issue only a warning to CVC Capital Partners, and not an outright termination of the investment.

That action followed a similar pass the council provided a year ago to an investment management professional who made a $1,000 contribution in 2013 to state Sen. Ray Lesniak (D-Union) despite the state holding a stake in his equity fund, Prologis Management. An exemption was also granted in that case.

And also last year, an audit performed by the state Department of Treasury cleared a $15 million investment in a venture-capital firm launched in 2011 despite a $10,000 contribution made in the same year by one of the firm’s investment-management professionals to the New Jersey Republican Party.

The audit determined that the investment-management professional, Charlie Baker, was not affiliated with the specific fund that the pension system was invested in. Baker, a Republican, is now the governor of Massachusetts.

Asked after the meetings if granting too many exemptions was weakening the state’s overall prohibition against political interference, Liebtag said the council will continue to review matters on a case-by-case basis.

“I don’t think this (CVC Capital Partners) exemption opens the door to anything in the future,” Liebtag said. But he also repeated his call for the overall political-interference policy to be reviewed and possibly revised.

At the beginning of the meetings yesterday, the council heard from Laurence Fink, the chairman of BlackRock, the world’s largest asset manager, as it prepared to discuss investment plans for the upcoming 2017 fiscal year. Fink, who has been mentioned as a possible future candidate for U.S. Treasury secretary, talked about “volatile” and “chaotic” financial markets at the outset of 2016, raising economic turmoil in China as a particular concern.

“We live in a real uncertain world,” Fink said.

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