PSERS’s investments for a recession: Warehouses, debtors, but no private schools

PSERS, the Pennsylvania teachers’ pension agency, on Friday approved three investments that shone light on how the $70 billion plan hopes to make money in a weak investment market — and rejected one in a vote that underlines the influence of the half-million working and retired school staff who are plan members.

After reviewing plans to pump nearly $1.2 billion into a series of investments recommended by staff and consultants, the board approved three choices totaling $825 million — away from the costly hedge funds the system used to favor and toward money managers hunting for bargains at firms squeezed by higher fuel and food prices and in U.S. warehouses, which have lately replaced offices as a favorite for commercial developers.

Last year, the board voted to dump all $7 billion it had invested in hedge funds, also known as “absolute return funds,” after a majority of the 15 trustees blamed the agency’s hedging strategy for missing out on the bull stock market that ran most years from 2009 to 2021.

Investments headed to the scrap heap included the $275 million invested with Caspian Capital LP, a New York hedge fund manager. Trustees had voted in 2018 to invest in the firm’s “Capital Opportunistic Dislocation Strategy,” which bought junk bonds of companies “under pressure from falling prices” in 2018, when energy and other commodities were losing value.

PSERS is now pulling that money out of Caspian’s hedge funds — and reinvesting it, plus $350 million in additional PSERS money, in another Caspian junk-bond fund, Caspian Keystone Focused Fund Ltd. — only it won’t be called a hedge fund.

Some board members took a little persuading. “It looks like a hedge fund,” said Stacy Garrity, the state treasurer, during an investment review meeting on Thursday.

“You say it’s not a hedge fund? So they won’t charge us like a hedge fund?” asked State Sen. Katie Muth (D., Montgomery). PSERS paid Caspian $10 million in fees last year.

Indeed, the fees will be lower — more like those of a bond fund, instead of a hedge fund, PSERS staff assured the board.

State Rep. Francis X. Ryan (R., Lebanon) said Friday morning that he was still prepared to vote against Caspian. “I’m concerned about the dollar amount; it’s almost 1% of our assets,” he said.

Not to worry: PSERS chief investment officer Robert Devine (corrected) said Caspian officials had already assured him they would accept PSERS’s money even if the agency shaved $150 million from its original proposal (which had been to add $500 million to the previous investment).

That was good enough for Ryan, and the proposal passed, with only trustee Joe Torsella, representing Gov. Wolf, voting no.

The board also voted to invest $100 million in TDR Capital V LP, a United Kingdom-based fund investing in troubled companies in Europe, where the Russian attack on Ukraine has pushed national economies into recession, creating bargains for investors, according to TDR managers and PSERS staff.

And trustees voted to invest $100 million in EQT Exeter Industrial Value Fund VI, which buys warehouses in the U.S. PSERS had previously invested with predecessor Exeter Property Group, based in Conshohocken. Chief executive Ward Fitzgerald, a long-ago aide to the late Philadelphia developer Bill Rouse, sold the firm to Sweden-based EQT last year.

Like TDR, the Exeter investment passed with no opposition.

But trustees blocked a staff-recommended $204 million investment in Antin Infrastructure Partners V, a European company that planned to pump the state’s money into U.S. and European government contractors.

That may sound like a recession-proof business. But as trustee Ryan noted, Antin investments include “social infrastructure,” such as private social service and education companies.

That provoked objections from public school allies on the board during both public and closed-door discussions. School and government labor unions vigorously oppose contracting public services to private contractors, which means fewer jobs for members.

In the end, all five of the teachers’ union members, all five of the elected officials, and two of the Gov. Wolf appointees on the board either voted no or abstained.

Patrick Lord, representing the state education department, and Eric DiTullio, a Western Pennsylvania school board member who recently stepped down as his school district’s chairman after he was criticized for a social media post, voted yes on Antin. (Corrected, an earlier version of the story wrongly identified treasurer Garrity in support. She voted No.)

Also behind closed doors, the board reviewed plans for dealing with Aon, the consultant it blames for a report exaggerating investment returns for 2011-20.

Correcting the error, the agency was obliged to raise pension payroll deductions for 100,000 mostly younger staff for three years, starting last July. The error became a subject of two federal investigations, one of which, by the Securities and Exchange Commission, remains ongoing.

According to people familiar with the discussions, PSERS lawyers are pressing Aon to reimburse some of the $6 million PSERS has had to pay contractors to deal with the investigation since March 2021. Some trustees also want Aon to provide more information about what went wrong. Aon has declined to discuss the dispute.

The PSERS board may look a lot different next year. Sen. Pat Browne (R., Lehigh), a reliable teachers’ union ally, was defeated in his primary election, and Ryan isn’t running again. Wolf’s term ends in January, making it likely his appointees will be replaced. And Sue Lemmo, a Curwensville art teacher, plans to retire, making her ineligible to continue representing teachers.

On Friday, Melva Vogler, 88, a former board chair (and ex-Lake Wallenpaupack math teacher) who now represents retirees on the PSERS board, said she, too, is planning to step down — and that she hopes Lemmo will succeed her. That would keep all five “member seats” in the hands of members of the Pennsylvania State Education Association, the state’s largest teachers’ union.