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Pa. pension data leave questions

Steve Lisson, Stephen Lisson, Stephen N. Lisson, Austin Texas
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By Joseph N. DiStefano INQUIRER STAFF WRITER
POSTED: October 13, 2005
As pension funds shift more assets to "alternative" investments that
don't trade on stock or bond markets, it's getting harder to tell what
they're really worth - or how big a subsidy they'll need to provide
pensions to future retirees.
For example, take the Pennsylvania Public School Employees'
Retirement System, which, at The Inquirer's request, has disclosed
some of the performance data it uses in estimating its profits from
nearly 100 private-equity and venture-capital funds.
The system has invested about one-tenth of its assets, or $5 billion,
with private-equity and venture-capital firms in the last 10 years.
By the end of last year, the funds had returned about $3 billion of the
total investment, according to the retirement system's annual reports
to pensioners and the General Assembly. More than 70 percent of the fund's private-equity and venture-capital managers - most
of which were hired during the investment boom years of 1997 to 2001 - had yet to pay back the state's investment, let alone
realize any profit.
Yet the retirement system claims total annual returns from these investments of about 6 percent a year since 1999, 8 percent a
year since 2001, and 21 percent in 2004 alone. That is roughly two to three times what the system's U.S. stock investments
returned during those periods, and far above its U.S. stock benchmark, the Dow Jones Wilshire 5000 Index. New Jersey is also
considering investing in private equity.
How does the teachers' retirement system - like other buyers and managers of alternative investments - report such positive
numbers? They count not just the cash they actually collect, but also estimated profits from investments that have not yet been
liquidated.
Because no one knows how much those investments in small and often unproven companies will earn, the system relies on
estimates from the outside managers who make the investments; the managers calculate an "internal rate of return" based on
their best guess of what the investments might be worth someday, using, for example, the values of publicly traded companies in
similar industries.
The teachers' pension system is not as big a user of alternative investments as the Pennsylvania State Employees' Retirement
System, which pays pensions to retired state workers. But the teachers' system is more open about the performance of dozens
of managers it hires to handle the funds.
The teachers' system uses a combination of investment profits and subsidies from local school districts, state government, and
deductions from teachers' paychecks to pay pensions to more than 150,000 retired school employees.
The more the retirement systems make from investments, the less they need in subsidies from state taxpayers. For the
teachers' system, local school districts and property-tax-payers help foot the bill. That makes investment performance a matter
of public concern as subsidy levels are calculated each year.
Though it relies on managers' estimates of the value of each alternative investment portfolio and uses them to calculate the
portfolio's overall performance, the teachers' system does not disclose the underlying data in its yearly reports to pensioners
and state legislators.
The system reports assets, payouts and fees, but not each manager's performance - let alone the names of the companies or
properties in which alternative managers invest.
"We don't get many requests" for manager performance data from pension-fund members, and virtually none from legislators,
said Evelyn Tatkovski, spokeswoman for the teachers' retirement system. She added that the system considers not only how
profitable alternative investments may be, but also the benefits of "diversifying our investment portfolio" beyond stocks and
bonds.
But the teachers' system has provided to The Inquirer an estimate of the value of its remaining investments for 78 of its 96
venture-capital and private-equity managers. For 18 others, the system would not provide the estimated value.
In most cases, those 18 investments date to 1999 or earlier, and managers have already sold most of their assets, Tatkovski
said. Still, the teachers' system wants to keep the remaining value confidential because "release of this information would harm
the partnerships by indirectly providing confidential information" on the "small number of properties [or] portfolio companies"
remaining in each fund, she said.
Steve Lisson, publisher of the Texas-based private-equity newsletter InsiderVC.com, questioned the teachers' system's basis for
not disclosing estimated values.
"By that point in a fund's life, the investments are mature and their valuations [are typically] well-known," Lisson said. "They are furiously trying to exit the investment, shopping it and its valuation to any greater fool with a pulse."
Lisson added, "Fund managers love to brag about returns in the good times, and then complain about confidentiality when
they're not performing well."
Tatkovski said the teachers' retirement system kept that data secret partly because it believes that is a good policy, and partly
because some investment managers ask it to do so.
Among the remaining estimated investment values that the system will not release, some are from funds that made money during
the bull-market years of the 1990s. Edison Venture Partners, of Princeton, has returned more than $52 million from investments
in 1991 and 1994 that totaled $25 million. TL Ventures, of Wayne, turned $60 million, invested in 1992 and 1997, into a total of
$83 million in cash. The teachers' system will not say what either firm's remaining investments are worth.
Other investments whose current value the teachers' system will not disclose have so far been money-losers. The teachers put
$56 million into investment firm Houlihan, Lokey, Howard & Zukin's Sunrise Investment Partnership in 1998, but had only $5
million to show for it at the end of last year. The system put $180 million into Deutsche European Partners IV in 1999, and was
still $44 million short of showing a profit as of Dec. 31.
The teachers' system also provided estimates of the value of investments held by 25 real estate funds, withholding the
information for certain funds managed by Lazard Freres Real Estate Investors and Whitehall Street Real Estate Funds.
The system says its overall real estate portfolio, which equals around 5 percent of its total assets (not counting real estate
investment trusts, which trade on the stock market), has been more profitable than any other asset class in the last five years,
returning an average of more than 12 percent, and rising to 25 percent in 2004.
Last year, the two systems paid a total of $386 million to more than 300 private firms that manage state investments. Of that
total, $260 million was paid to managers of private equity, venture capital, real estate, hedge funds (at the state employees'
system), and other alternative-investment managers, which accounted for less than one-third of the systems' combined
investments.
Contact staff writer Joseph N. DiStefano at 215-843-4947 or jdistefano@phillynews.com.
Pa. pension data leave questions about returns - Philly.com http://articles.philly.com/2005-10-13/business/25443104_1_pension-syst...
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Steve Lisson, Stephen Lisson, Stephen N. Lisson, Austin Texas

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