New Mexico CIO: Don’t ‘Pander’ to Asset Managers

Investment chief Jon Grabel says public pensions should continue to be wary of investment terms that overly benefit general partners.

Accepting excessive fees from private equity firms is an “abdication” of fiduciary duty, the CIO of New Mexico’s pension fund has argued.

“We are the smart money because we have principles to which we adhere while prudently deploying capital.”In a viewpoint published this week, Jon Grabel of the New Mexico Public Employee Retirement Association (PERA) refuted arguments that public pension funds should “wise up” and accept “any terms in the quest for high investment returns.”

“We have a duty to make sure we’re getting our money’s worth in pursuit of our mission, and when somebody says, ‘Just trust us,’ to me, that’s a tell,” Grabel said in an interview with CIO.

Grabel’s comments were a reaction to the “commonly held opinion” that private equity firms prefer working with sovereign wealth funds, endowments, foundations, and high-net-worth individuals because they are “less sensitive to investment terms and transparency issues,” he explained—the subtext being that public pension funds are “not the smartest investors and incapable of fully embracing the endowment model.”

This criticism of public pensions is flawed, he wrote, because it “assumes that opaque investment schemes lead to superior outcomes,” and forgets that GPs stand to benefit hugely from management fees regardless of whether they deliver on performance.

“Institutions that pander to their money managers are prone to excuse poor performance and condone excessive compensation,” he argued. “We at PERA are, in fact, the smart money because we have principles to which we adhere while prudently deploying capital.”

These principles include holding both PERA and GPs to high standards of transparency, as well as demanding that asset managers are “humble, hungry, and aware of their fiduciary duty to the ultimate investor (our members).”

The ideal GP, Grabel continued, is “disciplined with respect to fund size, patient in the deployment of capital… (and) adverse to ancillary fee income.”

Those investment terms better be balanced. Grabel said PERA had already backed away from current and prospective investments over “egregious terms and economics,” calling bad terms a possible “indication that a GP has ‘jumped the shark.’”

“Managers need to remember who’s paying their salaries—it’s our members’ money,” Grabel told CIO. “Questioning what the drivers of returns are and not just keeping things in an opaque structure—that’s my duty, that’s my responsibility as opposed to just paying a fee because others are paying it.”

Related: CIO Profile: Two Weeks into Job, New Mexico’s Grabel Talks Changes & Taking the Guesswork Out of Private Equity Fees

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