Big public pension funds might help to rescue ailing Wall Street banks, but their corporate counterparts will sit on the sidelines, pension experts say.
Only the biggest public funds with large internal investment operations have deep enough pockets and the investment latitude to follow the lead set by the $81.3 billion New Jersey Division of Investment. The Trenton, N.J.-based unit, which oversees $81.3 billion in state pension assets, provided capital infusions last week for Citigroup Inc. and Merrill Lynch & Co. Inc., both of which took huge write-downs because of their exposures to subprime mortgages.
The New Jersey division invested $400 million in convertible preferred shares in Citigroup and another $300 million in convertible preferred shares in Merrill Lynch, both in New York.
“To the degree they (pension funds) have room in their portfolio to make this kind of investment, and if they consider the risk-reward terms to be favorable, why would they not make the investment?” said Keith Ambachtsheer, director of the Rotman International Center for Pension Management, Toronto University. Mr. Ambachtsheer is also president of KPA Advisory Services Ltd., Toronto. Pension funds “are a logical source to be bailing out financial institutions,” added Richard Ennis, chairman of Ennis Knupp & Associates Inc., Chicago, and editor of the Financial Analysts Journal.
But they’re hard-pressed to compete with giant sovereign wealth funds that took major stakes in Citigroup and Merrill Lynch, unless sentiment against the foreign funds turns sharply negative on Capitol Hill. Already, Democratic presidential contender Sen. Hillary Clinton is calling for increased transparency for sovereign wealth funds.Citigroup’s sale of convertible preferred securities amounted to $12.5 billion, with a single sovereign fund — the Government of Singapore Investment Corp. — ponying up 55% of that total. Other investors included Kuwait Investment Authority, HRH Prince Alwaleed bin Talal bin Abdulasziz Alsuad, Sanford I. Weill and the Weill Family Foundation, Capital Research Global Investors and Capital World Investor, both part of Capital Group Cos. Citigroup raised another $6.15 billion from preferred stock offerings.
Merrill Lynch’s $6.6 billion private placement was bought primarily by Korea Investment Corp., Kuwait Investment Authority and Mizuho Corporate Bank, according to a Merrill Lynch statement. TPG-Axon Capital, The Olayan Group and T. Rowe Price Associates Inc. also invested on behalf of various clients, the statement said. In a previous financing round, Merrill sold up to $6.2 billion in common stock to Singapore’s Temasek Holdings and Davis Selected Advisors LP.
Sophisticated investors only
Non-U.S. pension funds also are stepping up to the plate.
The C$143.5 billion ($139.7 billion) Caisse de Depot et Placement du Quebec, Montreal, and the C$48 billion OMERS Administration Corp., Toronto, which oversees the Ontario Municipal Employees Retirement System, recently participated in a C$2.75 billion bailout of the Canadian Imperial Bank of Commerce, Toronto, which was hit with subprime problems.
“In general, we would consider any investment if it meets our criteria on risk and returns,” said Thijs Steger, spokesman for the e216 billion ($315.8 billion) Stichting Pensioenfonds ABP, Heerlen Netherlands. Mr. Steger declined to comment on the fund’s investment plans.
Experts say to invest in deals like Citi, Merrill and CIBC, pension funds must be big enough so that any single opportunistic investment won’t disturb a fund’s diversification.
“This is very much a big, sophisticated investor phenomenon,” said Jeb Doggett, partner, Casey, Quirk & Associates LLC, Darien, Conn.
To play, the funds also will have to have large enough in-house investment staffs to consider the bank proposals quickly. Most pension funds outsource most or all of their assets to money managers, and lack the internal expertise to evaluate these investment opportunities.
“If they don’t have a CIO and the staff in place to look at these (bank opportunities), it’s probably not going to happen,” said Mark Ruloff, director of asset allocation, Watson Wyatt Worldwide, Arlington, Va.
Because corporate pension funds, unlike public ones, are subject to the Employee Retirement Income Security Act’s diversification rules and new, more conservative funding requirements under the Pension Protection Act of 2006, they are not expected to be major players in riskier transactions such as the bank bailouts, said Mr. Ruloff.
Officials at two of the nation’s biggest pension funds declined to comment on whether they would participate in future deals.
Russell Read, chief investment officer at the $253.6 billion California Public Employees’ Retirement System, Sacramento, declined to say whether CalPERS had been approached by troubled banks, although Christianna Wood, senior investment officer, reportedly said banks had reached out to the giant fund.
Christopher Ailman, CIO of the $174 billion California State Teachers’ Retirement System, Sacramento, could not be reached for comment. “We cannot confirm or deny any upcoming deals, offers of deals or our considerations of deals until the contracts are signed,” said spokesman Ricardo Duran.
Private endowments and foundations are better positioned to make riskier bank investments than either public or private pension funds, Mr. Ruloff said, because they can simply reduce spending. Pension funds, on the other, still have to keep paying out benefits even if they lose money on their investments, he said.
Washington concerns
Still, sovereign wealth funds appear to hold the edge.
That’s the case in part because sovereign funds are better diversified globally than U.S. public funds, which tend to have a U.S. bias, according to Campbell Harvey, a finance professor at Duke University’s Fuqua School of Business, Durham, N.C.
Some sovereign fund investments may also be driven by a desire to curry favor with U.S. politicians, some experts said.
“There’s no doubt whatsoever in my mind that the reason (Citigroup and Merrill Lynch) were able to find so much money so fast is that the Gulf states have every reason to want to have friends in Washington and in the New York delegation, especially if Hillary Clinton is president,” said Donald G.M Coxe, the Chicago-based global portfolio strategist for BMO Financial Group, Toronto, Canada.
The heat appears to be building.
In a recent Democratic presidential candidate debate, Ms. Clinton said she was “very concerned” about sovereign fund investments in Citigroup and Merrill Lynch.
“I think we’ve got to know more about them,” Ms. Clinton said, according to a transcript of the MSNBC-sponsored debate. “They need to be more transparent. We need to have a lot more control over what they do and how they do it.”
“We need to know what’s actually happening,” added former Sen. John Edwards, according to transcript.
On Capitol Hill, Sen. Jim Webb, D-Va., is considering legislation to beef up U.S. government reviews of sovereign wealth fund investments in the U.S., according to Jessica Smith, a spokeswoman for the lawmaker.
Also, the Government Accountability Office is conducting a new study of sovereign wealth funds in response to a request from Sen. Richard Shelby, R-Ala. “We will look at how these funds could potentially affect the U.S. economically,” said Yvonne Jones, GAO director, financial markets and community investment team.