To the casual observer, the investment returns recently announced by the California pension system might seem like cause for celebration. The states investments in firms that buy private companies generated a 20% return in 2014.
Californias $30 billion worth of private equity investments did not come cheap, incurring almost $440 million worth of annual management fees paid to financial firms. But the double-digit gains helped the system generate some of the best overall pension returns in the nation positive news for taxpayers and for state workers who rely on the system in retirement.
Across the United States, similarly robust returns have proven key elements in the Wall Street sales pitch that has persuaded state and city pension overseers to entrust vast sums of money to private equity managers. The private equity industry has successfully portrayed itself as no less than a savior for underfunded pension systems.
By one estimate, $260 billion of public money is now under the management of these firms.
But as Congress considers reducing regulatory scrutiny of private equity firms, one problem complicates the narrative: A lot of the gains the private equity industry purports to have achieved are of the on-paper-only variety.