Why quiet deals?
After reading "Firm covets Aetna fund, pension funds asked to sell," on page 3 of your Nov. 25 issue, I felt compelled to voice my opinions and concerns on the issues that were raised.
I am astounded to hear of recent "quiet, negotiated deals" in the secondary market such as the recent agreement by Landmark Partners to acquire the entire $450 million real estate portfolio of the State of Connecticut Trust Funds. Our firm speaks with many institutional bidders on a daily basis who are frustrated because they have not been able to bid on such secondary market transactions even though they may have paid higher prices - in some cases, significantly higher prices.
We have hundreds of bidders wishing to invest billions of dollars that are unaware of such transactions until after they are reported in publications like Pensions & Investments. Are the pension funds selling by this method not neglecting their fiduciary responsibilities? I believe that any sale transaction in which only one or a very small number of bidders are contacted, when there are potentially many more bidders willing to pay higher prices, is imprudent.
I think the pensioners of these funds would be outraged to hear what their fund managers were not getting the highest prices possible for the assets in their pension funds. Are these not the same pension fund managers that fight tooth and nail for a 1/64th when it comes to buying and selling of equities?
Your article went on to outline the recent unsolicited bid by Everest Properties to the limited partners of the Aetna Institutional Investors I L.P. Do these pension funds not realize that if they are interested in selling, they do have other options? Pension fund managers do not need to accept an offer from a secondary market fund or "vulture funds."
Your article quoted Bob Kohorst, president of Everest Properties, as saying the transaction would be negotiated "privately." There are inherent flaws with a seller attempting to negotiate a sale in this way. First, our experience is that a buyer often starts out by bidding a price lower (sometimes much lower) than they may actually be willing to pay. Second, even the best price your bidder is willing to pay may not be the best price available in the market. Third, our experience tells us that if you have only one potential buyer, you may have difficulty negotiating your best possible price.
Secondary market funds run by firms such a Everest Properties understand this and that is why they want to keep these transactions private and negotiated one on one. In fact, at a recent institutional private equity conference, a general partner of one such secondary market fund said, "Secondary market funds would obviously rather do quiet negotiated deals and not subject them to price pressure." Other speakers lamented the fact that competition is squeezing the discounts our of the secondary market transactions. As a seller, would you rather do a quiet negotiated deal or do you want to get the highest bid? I am sure the pensioners of such funds would like the highest bid.
Your article quoted Peter Naoroz, real estate investment officer of the Alaska Permanent Fund, as saying, "I'm not going to confirm anything. This is a private bid. . . . I have value in these funds and, sure, everybody wants to have liquidity, but the way you achieve liquidity is not to talk about what you're doing. . . . The market is build on private transactions."
Mr. Naoroz's comments are music to the ears of secondary market funds like Everest Properties. As a buyer, not having any competition in a deal that you would like to buy is a sweet thing.
To date there has been very little liquidity in the secondary market of institutional private assets. Historically, the lack of a competitive "auction" process has resulted in an informal market where transactions have been negotiated privately. Pension fund managers need to know that they now have a choice between traditional one-on-one negotiations and competitive auctions.
The choice should be clear to the fund managers interested in selling these illiquid assets. Knowing the liabilities inherent in failing to meet fiduciary obligations, how can a fiduciary neglect to participate in a broadly promoted auction when selling?
Matthew S. Heller
Chicago Partnership Board Inc.
PBGC rates unfair
I read with great interest your Dec. 23, page 6 article relating to the Pension Benefit Guaranty Corp. One must wonder just what set of rules governs Martin Slate as he sets about to reform American business regarding its treatment of "the workers." That "the workers" need their pensions protected goes without saying.
What bothers me, however, is that Mr. Slate seems to think that all business should be grouped in setting rules for valuing pensions. Perhaps his modus operandi at the Internal Revenue Service where he formerly drew a paycheck has had too great an influence on the tactics at the PBGC.
We recently witnessed a campaign in which the child took center stage and the public was told in no uncertain terms that government must and would take decisive action to ensure the welfare of "the children." That mentality has now been transferred to "the worker" and business will pay or else.
Never mind that all but a few funds are properly funded. Mr. Slate will ensure the public knows that American business are corrupt and unethical. And, he will support such allegations by the use of unrealistic interest rates, arbitrary rules and inane assumptions.
According to rules promulgated by his department, pension funds must use termination valuations to determine funding levels. However, none of the companies on his "Top 50" list will terminate anytime soon. We must use an interest rate that is lower than the Treasury bill return. But, most frustrating of all, we are prohibited from funding a plan to the levels he desires by the very rules which deem we are "underfunded." A Catch-22? You bet. Unintended? Hardly!
Mr. Slate admitted over a year ago that such a result can and has occurred. But, rather than take immediate corrective action, he has chosen to force innocent pension funds to pay penalties to the PBGC. (Does this sound like an IRS tactic?)
Not only is such a policy insane, it exacerbates the very problem he purports to solve. Your see, money which would be used to fund pension plans is instead diverted to the payment of penalties or consultants hired to devise clever schemes to thwart the payment of penalties. Does this benefit "the workers"?
I trust I haven't been too subtle in my observations. The point I have been trying to make is really quite simple. Yes, let's get tough on companies who are in arrears with their funding requirements, but let's keep the method of determining proper funding levels reasonable and clear.
And please modify the rules so that the first options to avoid an underfunding penalty is to make a contribution. To do less is to make a mockery of the position of pension overseer.
Marlin J. Dorhout
Letters to the editor and submissions of commentaries for the Others' Views section may be sent to Barry B. Burr, editorial page editor, by mail to 740 N. Rush St., Chicago, IL 60611 or by e-mail to [email protected] or by fax to (312) 649-5228. Pensions & Investments welcomes contributions and comments.