Senate Banking Committee Chairman Sherrod Brown, (D., Ohio) is on the right track in demanding more legally required disclosure from shadowy private equity funds in which Ohio’s public pensions have way too much invested.
Mr. Brown and seven fellow Democrats have written to Securities and Exchange Commission Chairman Gary Gensler asking for quick work on a rule to bring necessary transparency to private equity financial reports.
Private equity managers have nearly $14 trillion, mostly supplied by public pensions like Ohio’s five funds which have $28.6 billion invested in this asset category. In theory, private equity funds buy businesses, make management improvements, and sell for a profit.
Mr. Brown is properly skeptical of private equity asset valuations which have been far out of step with all other market indicators. The SEC is proposing requirement of an annual outside audit to verify values the private equity firms now provide without oversight.
The Ohio Police & Fire Pension Fund reported a 54.5 percent gain in private equity in the last year. All other Ohio pensions claim gains above 20 percent except the Ohio Public Employees Retirement System which reported a more realistic 4.79 percent loss.
These are hard to believe as the stock market value of private equity giants fell dramatically.
“Because private fund advisers’ fees are calculated based on fund asset valuations, the accuracy and transparency of fund asset valuation practices is crucial to prevent overcharging of investors and to mitigate conflicts for private fund advisers,” Mr. Brown wrote.
Inflated claims of performance are used to justify the fees and expenses that are paid to private equity managers. Since 2018 OPERS has paid its private equity fund managers almost $1.3 billion.
Private equity managers typically take 20 percent of a fund’s investment profit. In the last five years OPERS has provided those fund managers $608.2 million. The conflict of interest Mr. Brown details is obvious when you understand those profit shares were based on valuations set by the fund managers collecting the bonus.
There has been no transparency requirement on private equity because large investors like Ohio’s pension funds are assumed to be sophisticated and have no need for protection by the SEC.
But the beneficiaries of these pensions and the taxpayers who fund them are endangered financially by untrustworthy financial statements.
Friday, OPERS reported a $16 billion loss on investments and a decline in assets of $20.2 billion. That’s with a private equity valuation that is significantly better than the overall market and provided by managers with a massive conflict of interest.
There is a shortfall in the public pensions that Ohio taxpayers are being asked to fill.
The true extent of the problem cannot be established when pension financial reports cannot be trusted.
It is wise that Senator Brown is making a federal issue out of it.
First Published May 23, 2023, 4:00 a.m.
