Private-equity firm Apollo prices IPO at $19 a share

Private-equity titan Apollo Global Management priced its initial public stock offering at the top end of expectations Tuesday, signaling strong investor interest in the company.

New York-based Apollo and its investors sold a total of 29.7 million shares at $19 each, raising $565  million. The company had estimated it would sell 26.3 million shares at $17 to $19 each.

Apollo, founded by ex-Drexel Burnham Lambert alumnus Leon Black in 1990, primarily raises money from institutional investors to buy and manage companies, including distressed businesses, hoping to eventually sell them or take them public at a profit.

Apollo’s portfolio is worth $67 billion and includes such firms as casino operator Caesars Entertainment, retailer Smart & Final, burger chain Carl's Jr. and movie-theater chain AMC Entertainment. The firm also operates hedge funds and owns real estate portfolios.

The stock will begin trading on the New York Stock Exchange on Wednesday under the ticker symbol APO.

The IPO is a stake in the management company itself, not in the various investment funds it manages for clients. The company's earnings are derived from fees charged on its funds and on its share of any gains generated by the funds.

Apollo joins the ranks of other private-equity firms that have opted to go public in recent years, including KKR & Co., Blackstone Group and Fortress Investment Group. Apollo set plans for the IPO three years ago but the deal was put on hold amid the financial-system meltdown.

The firm is a longtime asset manager for the California Public Employees' Retirement System, and it paid tens of millions of dollars to a former CalPERS board member who helped it land billions of dollars of investments from the pension giant.

The conduct of such placement agents, including Alfred J.R. Villalobos, has exploded into a major scandal for CalPERS, although Apollo wasn't accused of wrongdoing.

-- Tom Petruno

CalPERS bets it can earn at least 7.75% a year

The state’s largest public pension fund is sticking with the assumption that it can earn at least 7.75% a year on its investments, on average, over the next 20 years.

The board of the California Public Employees’ Retirement System on Wednesday voted to maintain the 7.75% rate, despite some board members’ concerns that the assumption was too optimistic.

Cutting the rate would have forced municipalities statewide to raise their contributions to the fund to make up for the potential future shortfall in the $225-billion investment portfolio, which owes retirement benefits to 1.6 million retired and active state and local workers.

CalPERS’ chief actuary, Alan Milligan, had recommended lowering the assumed return rate to 7.5%, but also said that the 7.75% rate was “reasonable and achievable.”

The fund says that over the past 20 years its returns averaged 7.9% a year before deducting administrative and investment expenses. But that period includes the 1990s, which were years of soaring stock prices and of bond interest rates far above current levels.

The state’s other huge pension fund, the California State Teachers’ Retirement System, also assumes it can earn 7.75% a year over the long term. The CalSTRS board trimmed its rate from 8% in December.

A study by the National Assn. of State Retirement Administrators last year found that the majority of large public pension funds had assumed average annual returns of 8% or more.

Critics say those assumptions are too rosy and that pension shortfalls are inevitable if employers and/or employees don’t raise their current contributions to the funds, or if benefits aren't reduced.

CalPERS’ reputation has been tarnished over the last year by the scandal over insider dealings at the fund. The fund this week released an independent report that accused its former chief executive of pressuring subordinates to invest billions of dollars of pension money with politically connected firms.

-- Tom Petruno

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CalPERS halts contract renewal talks with drug-benefits administrator Medco

Scathing report faults CalPERS, former chief executive on Villalobos payments

In a scathing report, a former chief executive of the California public employee pension fund was accused of pressuring subordinates to invest billions of dollars of pension money with politically connected firms.

A 17-month investigation also found that Federico Buenrostro Jr. -- along with former pension fund board members Charles Valdes and Kurato Shimada –- strong-armed a benefits firm to pay more than $4 million in fees to consultant Alfred J.R. Villalobos, who later hired Buenrostro.

The report, prepared for the California Public Employees' Retirement System by the Washington law firm Steptoe & Johnson, comes amid widening attacks on public employee pension funds in California, Wisconsin, Iowa and other states for providing overly generous benefits that cash-strapped governments can no longer afford.

The findings of insider dealings at CalPERS could provide fresh ammunition to Republican lawmakers here who want Democratic Gov. Jerry Brown to convert traditional pensions with guaranteed payments for life into 401(k)-type retirement savings plans that rely heavily on employees’ own contributions.

“Fixing California's pension problem is difficult enough without the stench of corruption and collusion that saps public confidence and gives taxpayers a reason to withhold support,” said Dan Pellissier, president of Californians for Pension Reform, a group that is pushing a ballot initiative that would diminish state employee pension benefits.

Shimada, Buenrostro, Valdes and Villalobos either declined to comment or did not return calls. 

Read the full Times story here.

Read the full report here.

-- Marc Lifsher and Stuart Pfeifer

 

 

Governor pulls two teachers pension fund appointees

Gov. Jerry Brown has pulled back two controversial, last-minute appointments made by then-Gov. Arnold Schwarzenegger to a state teachers pension board.

On Dec. 31, Republican Schwarzenegger named Steven Kram, 54, of Los Angeles and Cameron Percy, 26, to the California State Teachers' Retirement System, a $150-billion pension system.

Kram is president and chief executive of Content Partners, a Los Angeles firm that buys films in the secondary market from other investors. Content Partners' co-chairman, Paul Wachter, is Schwarzenegger's financial advisor.

Percy, a recent graduate student at Stanford University's Department of Economics and Public Policy Program, helped write a controversial study commissioned by Schwarzenegger's office. The research estimated that the state's three biggest public pension funds were $400 million short of the amounts needed to meet future obligations to retirees.

Schwarzenegger during his last year in office made reducing government worker pension costs a major priority in his efforts to balance California's state budget.

Gov. Brown's office declined to say why he pulled Kram and Percy. "These appointees served at the pleasure of the governor, and their services were no longer required," spokesman Evan Westrup said.

The California Federation of Teachers welcomed the removal of Kram and Percy from the CalSTRS board. "We feel these appointments were inappropriate because of their ideological agenda," spokesman Fred Glass said.

Marcia Fritz, the director of the Foundation for Fiscal Responsibility, an educational group that researches public pension costs, said she wasn't surprised that Brown yanked two conservative voices from the CalSTRS board.

"CalSTRS has routinely been labor friendly," Fritz said, "so I would expect Brown to appoint labor-friendly people in their place."

-- Marc Lifsher

 

Wall Street Roundup: Toxic treasures. Anxious pensions.

Gold: Trading now at $1,347 per ounce, up 0.4% from Friday. Dow Jones industrial average: Trading now at 11,0950.10, up 0.6% from Friday.

Toxic treasures. The government's purchase of toxic assets during the financial crisis was unpopular, but the investments are now making the government significant returns.

Anxious pensions. Public pension funds are worrying about their investments in hedge funds that have been targeted in the government's ongoing insider trading investigation.

Morgan Stanley's problem. A Morgan Stanley banker was the first Wall Street figure to be publicly drawn into the government's Galleon Group insider trading case, thanks to a court filing on Friday. 

Metal mania. While many on Wall Street are expecting to see their bonuses drop from 2009 levels, people who trade metals are among the lucky few expecting compensation to go up.

--Nathaniel Popper

Credit: Stan Honda/Getty Images

 

CalPERS, CalSTRS post solid investment returns

Investment returns at the nation's two largest public pension systems are back on track after suffering steep losses during the Great Recession of 2008-09.

The California Public Employees' Retirement System on Thursday reported that its investments grew by 12.5% in the calendar year that ended on Dec. 31. That's in line with a 12.1% gain posted for calendar year 2010.

The smaller California State Teachers' Retirement System ended the year with a 12.7% return.

Both funds' total performance bested their selected market benchmarks.

"We repositioned our portfolio to take full advantage of the overall gains in the market last year," said CalPERS Chief Investment Officer Joseph Dear. "The strong returns we saw in 2010 prove that our top-to-bottom evaluation of all our investments is paying off for our beneficiaries and our employers."

As of Jan. 18, CalPERS' total investment portfolio was valued at $228.5 billion. That's still 12% off its historic high of $260 billion in October 2007 but considerably better than the recession low of $160 billion in March 2009.

Last year, CalPERS' investment performance topped market benchmarks in all areas except real estate. Global stocks returned 14.6%, fixed income and bonds 11.6% and so-called alternative investments, such as venture capital, private equity, returned 21.5%.

Only CalPERS' real estate investments lost money last year, falling by 5.1%, compared with a market benchmark that grew by 9.3%.

CalPERS' performance for both its alternative investments and real estate reflected returns through the third quarter of last year because of a lag in reporting all financial data.

Growth in CalSTRS investments has pushed the fund back to its October 2008 level at $146.4 billion.

"This is very encouraging news, but the historic market declines of the 2008-09 financial crisis showed us that CalSTRS cannot solely invest its way to healthy long-term funding," said Chief Executive Officer Jack Ehnes.

Ehnes and his board of directors plan to ask the Legislature this year for a boost in employer contributions to the retirement fund. CalSTRS still faces a shortfall in the money it needs to meet its long-term financial obligations, Ehnes said.

For its part, CalPERS already has begun boosting contributions paid by its member employers, including state and local governments and school districts.

-- Marc Lifsher

CalPERS changes management of $724 million in real estate

The California Public Employees' Retirement System on Monday announced that it had changed managers for $724 million in commercial real estate.

Privately held CommonWealth Partners of Los Angeles replaced Hines of Chicago as manager of CalPERS' National Office portfolio of 5.2 million square feet of Class A properties in major U.S. markets, including San Francisco; Palo Alto, Calif.; Boston; Chicago; Seattle; Minneapolis; Salt Lake City; Austin, Texas; and Denver.

CalPERS said the transfer is part of an ongoing general realignment of its real estate holdings since suffering steep losses during the recession of 2008-09.

"CommonWealth Partners has done extremely well for us for over 12 years now, and we anticipate very good performance from them and the domestic office portfolio," said Ted Eliopoulous, the senior investment officer in charge of the pension fund's $15 billion in global real estate.

CommonWealth has executed more than $4 billion worth of transactions in other CalPERS partnerships since 1998, the fund said.

Last month, CalPERS moved $1.9 billion worth of North American industry property  to GI Partners and $60 million in European holdings to Deustsch Bank's RREEF management subsidiary.

The $222-billion CalPERS is the country's largest public pension fund. It administers retirement benefits for 1.6 million state and local employees, retirees and their families.

-- Marc Lifsher

Andrew Cuomo and Steve Rattner settle pension fund case

Just two days before leaving office, New York Atty. Gen. Andrew Cuomo opted to settle his lawsuits against financier Steve Rattner. 

Rattner, a former banker who became President Obama's auto industry czar, agreed to pay $10 million to end two lawsuits that accused him of paying kickbacks to win investment business from the New York State pension fund.

Rattner was one of several investors accused of improperly securing investments from the state's Common Retirement Fund. Cuomo already won guilty pleas from eight people in the case, including former state Comptroller Alan Hevesi.

The settlement brings a quiet end to what was a bitter public fight between Cuomo and Rattner.

Cuomo opted to sue Rattner on the same day that the Securities and Exchange Commission announced that it was settling with Rattner, and Cuomo demanded that Rattner be permanently barred from the securities industry.

In the days after Cuomo filed his suits, the two men threw sharply worded barbs at one another, with Rattner calling Cuomo a bully and Cuomo saying that Rattner's conduct amounted to "stealing taxpayers' money."

The lawsuit alleged that Rattner paid Hevesi advisors more than $1 million to win $150 million in investments for his former firm, Quadrangle Group.

Under the settlement, Rattner will not be able to seek business from public pension funds for five years.

Cuomo will become New York's governor Saturday.

-- Nathaniel Popper

Photo: Steve Rattner. Credit: David Guralnick / Detroit News

CalSTRS cuts estimated rate of return

The state's second-largest government pension fund is lowering its expectations.

But only by a little bit.

The $141-billion California State Teachers' Retirement System on Thursday reduced its long-term assumed annual rate of return on investments from 8% to 7.75%. At the same time, the pension fund's governing board cut its assumed annual wage inflation to 4% from 4.25%.

The drop in the actuarial estimated rate of return is based partially on recession-related market declines and concerns that "recent economic events are having an undue impact on perspectives about the long-term economy," CalSTRS said in a press release.

The assumed rate of return is a key element in calculating how much money the pension fund needs to earn to meet future obligations to 848,000 public school educators and their families, CalSTRS said.

Adopting the new rate of return lowers CalSTRS' long-term funding level to 76.5%.

On June 30, 2009, the fund had 78% of the money it needed, down from 87% the previous year. CalSTRS' unfunded liability hit $40.5 billion in 2009, compared with $22.5 billion in 2008.

Investment earnings alone are not enough to meet future obligations, CalSTRS said. As a result, the board is planning to ask the state Legislature next year to approve an increase in the employer retirement contribution rate paid by 1,400 school districts, county offices of education and community college districts.

--Marc Lifsher

 

 

CalPERS shifts real estate investments

The California Public Employees' Retirement System -- as part of a continuing reorganization of its real estate investments -- announced Wednesday that it is switching managers for $1.96 billion of its industrial property holdings.

CalPERS, the nation's largest government pension fund, replaced LaSalle Investment Management of Chicago with GI Partners of Menlo Park and RREEF Investment of Germany.

GI Partners will run $1.9 billion in U.S. assets, known as the CalEast portfolio, and RREEF will manage $60 million in European properties.

"We have confidence in GI Partners and expect excellent performance from the CalEast portfolio going forward, given their strong returns since they joined our real estate program in 2001," said Ted Eliopoulous, CalPERS' senior real estate investment officer.

The $216-billion CalPERS has suffered steep losses in its real estate holdings during the last two years. The fund was forced to write down a nearly $1-billion investment in undeveloped residential property near Valencia, $500 million in an apartment building partnership in New York's Stuyvesant Town-Peter Cooper Village and $100 million in a condominium conversion project in East Palo Alto.

-- Marc Lifsher

California public pensions underfunded

Independent government pension funds, including those operated by the city and county of Los Angeles, were in weaker conditions than previously estimated before the recession of 2008-2009, said a study released Thursday by Stanford University.

According to the report, written by former state Assemblyman Joe Nation of the Stanford Institute for Economic Policy Research, the state's independent pensions collectively didn't have enough money to pay for $195-billion worth of obligations to current and future retirees as of June 30, 2008.

Nation based that figure on a "risk-free discount rate" that projected that the funds would earn an extremely conservative average return of 4% a year. California pension administrators consider a 4% return as too low and base their forecasts on average annual returns of between 7% and 8%.

The average funding level, derived by dividing total assets by total liabilities, was only 44.7% for the independent systems, the Stanford study said. That's virtually identical to a number cited by a similar report earlier this year on the three big statewide pensions: the California Public Employees' Retirement System, the California State Teachers' Retirement System and the University of California Retirement System.

The growing obligation could force local governments to devote half of their payroll over the next 18 years to pay for such so-called unfunded liabilities, the study said.

According to Stanford, worst-case estimates for various Los Angeles-based retirement systems hit as high as nearly $40 billion as of mid-2008: the Los Angeles County Employees' Retirement Assn. had $39.7 billion, the Los Angeles Fire and Police Employees' System $14 billion, the Los Angeles City Employees' Retirement System $13 billion and the Los Angeles Water and Power Employees' System $8 billion.

The Stanford report "confirms that all levels of government have been understating the pension debts owed by taxpayers to government workers," said outgoing Gov. Arnold Schwarzenegger. He recently reached an agreement with lawmakers and some government workers unions to cut future pension benefits for new state hires.

-- Marc Lifsher