The Oregon Pension Fund is taking more risks than it discloses, according to the New York Times’ Financial Sleuth
The Oregon Public Employees Retirement Fund, one of the oldest and largest private equity investors, underestimates the risk of investing heavily in funds that use borrowed money to buy entire companies, according to the financial analyst who exposed Bernie Madoff’s Ponzi scheme.
An Aug. 4 article in the New York Times describes new work by Michael Markov, a mathematician studying financial markets.
According to Markov, Oregon’s pension fund is over 40% more volatile than its own public reports indicate, according to the Times. That means the company is taking more risk to generate higher returns than its public reports have shown, Markov says.
Oregon was a pioneer in using private equity to increase a pension fund’s returns. The state invested in a Kohlberg Kravis Roberts & Co. fund in 1981, when the three “corporate raiders,” as they were known, were just getting started. KKR rose to fame in 1988 when it bought Oreo cookie maker RJR Nabisco for $25 billion. This deal inspired a book that defined greed in the 1980s: Barbarians at the Gate: The Fall of RJR Nabisco.
The deal is called private equity because managers like KKR don’t source money in public markets. They procure it from foundations and pension funds. Private equity has been criticized by critics because managers often borrow billions of dollars to buy companies and then burden the target companies with that debt, leading to failure. Medford-based fruit seller Harry & David went bankrupt in 2011 after a company called Wasserstein & Co. bought him with $200 million in borrowed money the company couldn’t repay.
The problem with private equity, Markov said, is that the companies owned by KKR and others aren’t typically traded on public markets, so there’s no current way to see how much they’re worth compared to, say, Boeing Co .or Nike Inc.
Instead, according to the Times, the value of companies owned by private equity firms is based on “rare valuations.” These ratings give private equity the illusion of low volatility and lower risk, the Times cited Markov’s work.
“If you factor in the outdated pricing in private equity funds, the risks are much greater,” Markov told the Times.
And Oregon faces more risk than most pension funds because of its private equity exposure, the Times said. According to public records, as of April 30, Oregon had $25 billion in private equity funds, or 27% of the total $93 billion. This made private equity Oregon’s largest investment by category.
“On average, the risks borne by public pension funds are at least 20 percent greater than they report, largely because they fail to take into account the actual risks associated with private equity,” the Times wrote, citing Markov’s work. “Oregon’s pension fund is over 40 percent more volatile than its own stats indicate.”
Oregon’s pension system declined to comment on the matter, the Times said.
Treasury Department spokeswoman Amy Bates was contacted by WW and declined to comment specifically on Markov’s work. The Oregon Department of Treasury analyzes risk in ways that go beyond what is presented in its public quarterly reports, she said. Like other pension funds, it calculates risk using standard deviation, a measure of volatility, and by examining “drawdowns” — industry jargon for losses.
A chart from a Treasury Department presentation in April shows that Oregon’s portfolio suffered far smaller monthly losses than the Standard & Poor’s 500 index and a portfolio made up of 70% stocks and 30% bonds.
“We recognize that (Markov) disagrees with our reported portfolio volatility and agree that the reported volatility of monthly returns likely understates risk, due in large part to our allocation to private markets,” Bates said in an E -Mail. “However, we hope that the above information will help illustrate the variety of methods used by the Treasury Department and the OIC to measure portfolio risk and the frequency with which information is reviewed and shared beyond that published on the website.” quarterly fund reports.”
An example of a private equity deal in Oregon emerged last month. In 2012, the fund committed $750 million to KKR North America Fund XI. Using some of that money — and money from other pension funds — the fund bought American Medical Response for $2.4 billion in 2018 and then merged it with another company, Air Medical Group Holdings, to form Global Medical Response . GMR, through AMR, is the ambulance provider for Multnomah County and many other locations.
Since then, the value of Global Medical’s bonds has fallen amid fears that GMR will be unable to repay the debt imposed on them by KKR. In April, S&P Global Ratings lowered its rating on GMR’s loans and bonds to CCC+, a “junk” rating reflecting these concerns.
“The downgrade reflects our view that GMR’s capital structure is unsustainable over the medium to long term,” S&P wrote in its downgrade. “We believe that GMR is highly dependent on a variety of favorable conditions — including moderate labor and fuel costs, weather conditions and improving capital markets — to meet its financial commitments over the next 12 to 24 months.”
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