Trickle Down or Else (part 3) Where is Your Pension Money?

I read an article a couple days ago that was titled “Private Equity Woos Top Talent” published in the Financial Times. Two years ago there were articles about Hedge Funds wooing top talent from none other than Private Equity. Where is Private Equity getting it’s talent? Public companies. There is a brain drain going on now in public companies. We have the Hedge Fund industry taking stakes in public companies then unseating boards and replacing them with their own people. We have the Private Equity companies doing wholesale buyouts of public companies and once again replacing the public company’s boards with their own people. At the same time we have an aging baby boomer population in retirement age and not nearly enough mid and upper level management with the appropriate skills and experience in the marketplace to take all of these “new” positions.

If you were an executive of a public company in the US and Private Equity was willing to suck you in to the world of unregulated finance, highly leveraged companies with huge cash payouts to the takeover groups heads, salaries and compensation not scrutinized by elected boards and nosey share holders, no need to comply with regulations when signing off on company financials, wouldn’t you take it?

So where are these Private Equity funds getting much of their financing? You would never guess, the American taxpayer, worker, teacher, fireman: in other words the average public servant. Yep, that is exactly where they are getting lots of money, these people’s pension funds. According to an article in the FT published 28 August entitled “How US public funds fuel Private Equity”,

The public funds charged with securing the future of America’s pensioners are a crucial driver of the current boom in the private-equity industry. By channeling an increasing portion of the nation’s retirement pool into buy-out funds, the public custodians are feeding the cycle of takeovers, restructurings and sell-offs that define private equity.

“We are the big bucks now,” says Jay Fewel, an Oregonian who has been running the private-equity division of his state’s investment office since 1989. This year, Mr. Fewel has already made commitments worth $3.5bn to buy-out firms.

Pension funds in the US are slowly but steadily disappearing. The pension reform bill passed by the corporate government of the US all but spells out how to do away with the system all together while doing nothing to shore up the existing nearly bankrupt Pension Guarantee obligations of the US Government. As airlines and auto industries amongst others have been reeling from the fallout of exorbitant oil prices, the US Government has been impotent in figuring out how to divert some of the completely ridiculous profits being made by oil companies into shoring up the pension systems that have been dumped on them by industries directly affected by the rising energy prices.

At the same time, Private Equity funds are raking in money form the more secure forms of pension systems, the ones financed by the public servants and workers of stable industries.

This is dangerous for more reasons than I care to mention here, suffice to say, Bush failed to put the entire Social Security system in the hands of corporate raiders and other financial criminals but the retirement system now called Pensions has already handed over much of the cash and they will go down with the ship when these crooks over leverage themselves to the point where their little unregulated empires collapse. Of course, there will be no legal ramifications since they are not public companies and hold no legal obligation to anyone and will simply state they are failed businesses and no person ever went to jail for simply failing in business. As stated in the same article:

Recourse to legal action, so often used by corporate America when business deals go sour, is rarely open to participants in private-equity funds, because the limited legal liability significantly curbs their chances of winning in court.

Indeed, the power of investors in private-equity funds is very limited and has been shrinking further of late, according to industry participants. With investors eager to offer capital to their funds, private-equity managers have begun imposing tougher conditions on public pension funds.

Lawyers say that private-equity firms have been demanding stricter rules to prevent public funds revealing details of their investments and performance. At the same time, they have fought demands for greater accountability and transparency.

There will be no turning back the billions of dollars they have made in the process of crippling the companies they manage by issuing debt and raiding the corporate coffers either. Only the Pension Funds that have poured money into them will be reeling from the loss of their investments and screaming at the Federal Government Pension Guarantee system to bail them out.

Everyone will be scratching their head saying how did these “secure” pension systems go bankrupt? Suffice to say for now, this is not on anyone’s radar.

A final note from the desk of reality:

“Clearly they (public equity executives) are in a different economic stratum: they have limousines waiting to pick them up from meetings – and we cringe at paying three bucks for our lattes,” says Ron Schmitz, Oregon’s tall, heavy-set chief investment officer. “They are pretty good about not rubbing it in and we do get treated like peers,” adds Mr. Schmitz, who took the post in 2003 after running funds for Illinois and Blue Cross/Blue Shield, the health insurer.

According to one private-equity headhunter, the entire budget of Oregon’s investment office is at the lower end of what a senior partner at a large buy-out shop might expect to make in a year – even before any share of the profit from deals is doled out.