Why this Wall Street firm walked away from a $130M Pennsylvania pension investment

Less than two weeks after trustees of PSERS, Pennsylvania’s public school pension system, narrowly voted to send another $130 million to Insight Partners, the New York venture capital firm has decided that it doesn’t want that money after all.

The move follows Gov. Josh Shapiro’s unusual call for a do-over on that contested vote.

It also followed a civil enforcement action and fine on June 20 against Insight Partners by the U.S. Securities and Exchange Commission, which said the firm has been overcharging investors by failing to cut fees when the value of its investments declines, violating its own contracts.

Shapiro didn’t publicize his request, and PSERS and Insight had little to add.

Simply put, PSERS’ commitment in Insight Partners XIII LP Fund “is not moving forward,” as the firm’s management no longer seeks to include PSERS as an investor in the fund, PSERS spokeswoman Evelyn Williams told The Inquirer in an emailed reply to questions.

Williams directed queries about why Insight withdrew to officials at Insight’s offices in New York, who didn’t reply to inquiries seeking comment.

Shapiro’s office declined to comment.

Documents obtained by The Inquirer and accounts from sources at the pension system and state government show that Insight pulled out after PSERS’ board chair, Lower Merion teacher Chris Santa Maria, told fellow trustees that he had reluctantly agreed to Shapiro’s unusual request to revisit the June 9 vote to hire Insight.

At that meeting, state treasurer Stacy Garrity had listed several reasons for voting no on Insight: “below average” returns on some previous investments; Insight’s failure to give a “satisfactory” explanation for its investment in cryptocurrency exchange FTX, which federal prosecutors say was a fraudulent company; and concerns over Insight’s governance at a time when the SEC has been scrutinizing private-investment operations.

The Inquirer reported that close vote — and the fact that Shapiro’s acting secretaries of education and banking, who serve on the board, cast decisive votes in support of the Insight investment.

The secretaries gave other supporters, mostly school union representatives and their allies such as Rep. Matt Bradford, D-Chester, who usually rubber-stamp PSERS staff recommendations that come to a vote, just enough approvals to pass that deal, 8-6, over objections from Garrity and most other elected officials who serve on the board.

But the following week, Shapiro’s office asked Santa Maria to conduct a new vote, blaming his two appointees’ support for Insight on a “miscommunication.”

Shapiro has argued publicly against paying “Wall Street” private investments funds such as Insight, which he says tend to collect high fees but yield disappointing profits.

As head of Montgomery County government 10 years ago, Shapiro oversaw the dismissal of its private money-management firms and moved the capital to lower-cost index funds managed by locally based investment giants Vanguard and SEI.

In interviews, Shapiro has said he hopes to see similar changes at PSERS, which has one of the highest proportion of private investments among public pension fund in the United States, according to data from Boston College’s retirement center and other fund-watchers. (The push for simpler investments crosses party lines; for example, Gov. Shapiro is a Democrat; treasurer Garrity, who has favored similar reforms, is a Republican.)

Critics have said PSERS missed out on billions in profits from the 2009-20 bull market by concentrating on high-fee, illiquid investments instead of rising U.S. stocks.

Supporters of the policy said it was designed to conserve capital in down markets.

Top PSERS executives left in 2021 and 2022 amid federal and internal investigations of PSERS’ land deals in Harrisburg and its exaggerated investment returns. No one has been charged with wrongdoing, though litigation and review continue.

The board had already agreed to sell its hedge funds portfolios and direct real estate holdings over the next few years and to reduce its private-equity investments.

Shapiro’s call for a new vote wasn’t the only knock against Insight since the June 9 action.

Eleven days after the PSERS vote, the SEC filed a civil complaint in Washington accusing Insight of charging excess management fees from 2017 to 2021 and failing to disclose that its fee calculation formula represented a “conflict of interest” because the firm could benefit from minimizing write-downs in the value of its investments to avoid cutting its fees.

Insight agreed to pay $2.4 million in penalty, fees, and interest to end the case.

Asked how much PSERS lost because of Insight’s overpricing, spokeswoman Williams said in an email message that PSERS’ investment staff “is currently reviewing the Insight/SEC settlement” and had no further comment.

Since its founding in 1995 by University of Pennsylvania engineering and Wharton grad Jeff Horing, Insight has raised more than $90 billion to invest in more than 700 companies, many of them specialized software firms like photo-software developer Shutterstock and cloud-services builder Wix, and sought to sell them at big profits to other investors, including software giants such as Microsoft.

This wasn’t Insight’s first approach to Pennsylvania’s pension funds, which are largely financed by taxpayers, plus investment profits and payroll deductions from public workers. The state workers’ pension system, known as SERS, also uses Insight funds.

Insight’s record as a manager of PSERS money has been mixed. According to a report by a team of PSERS staffers last March, Insight had so far repaid a modest $44 million of the $522 million PSERS has pumped into seven Insight funds since 2018.

According to PSERS’ March report, Insight estimated that the pension system eventually will nearly double the money it invested with the firm in 2018-19, based on recent estimates of what the private companies it bought with PSERS cash were worth.

Indeed, Insight was among the firms that reaped the most from PSERS fees in recent years, including $74 million in “shared profits” and other PSERS fees for 2021.

But estimated returns are only modestly positive for PSERS funds Insight invested in 2020-21. And Insight acknowledged that the investments it bought with PSERS funds starting in 2021 were by 2023 worth less than the state paid for them.