CalPERS and Carlyle | The Nation


CalPERS and Carlyle

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But the new guidelines don't apply to the fund's substantial investments in private equity markets, including its $475 million stake in the Carlyle Group--nor does CalPERS, the nation's largest public pension fund, see any reason why it should. "I don't have any moral reservations at all" about Carlyle, said Michael Flaherman, chairman of the investment committee of CalPERS.

The $151 billion CalPERS retirement fund, the largest such fund in the world, is invested on behalf of California's 1.2 million state workers and includes $35 billion invested overseas. The fund's relationship with Carlyle began in 1996; over the next four years it invested $330 million in two Carlyle funds, including $75 million in Carlyle Asia Partners. The relationship deepened last spring when CalPERS invested $175 million to buy a 5.5 percent stake in Carlyle. The relationship--so close that CalPERS owns the elegant office building in Washington, DC, where Carlyle's headquarters are located--is far more important to Carlyle than it is to CalPERS, industry analysts said. "CalPERS is called an anchor investor," explained David Snow, editor of PrivateEquityCentral.net, an industry newsletter. "When Carlyle goes to other investors, they can say CalPERS is in."


Within the labor movement, CalPERS is highly respected for its cooperation in challenging managers and corporations suspected of violating human rights or abusing workers. In 1999 CalPERS supported two union-backed candidates for the board of Maxxam during a bitter strike by the United Steelworkers of America (USWA). Two years ago CalPERS joined the AFL-CIO in an investors' boycott when the Chinese government and Goldman Sachs took Petrochina, a state-owned oil company, public. The fund's new standards for public investments in emerging markets are the culmination of more than two years of sometimes fierce internal debate. CalPERS investment managers must now consider a wide range of non-economic factors, including a country's political stability, financial transparency and record on labor standards, workers' rights and building democracy. Based on a review by Wilshire Associates, the CalPERS pension consultant, thirteen emerging markets, including Turkey, South Korea and South Africa, passed the test, compared with four that failed. The fund had already banned its managers from investing in publicly traded companies in China and India. "CalPERS is taking more steps in this direction than any pension fund we know about," said Damon Silvers, the AFL-CIO's associate general counsel who focuses on investment strategy.

In December Carlyle sent its three founding partners to Sacramento to brief the CalPERS investment board. One, David Rubenstein, made passing reference to the budding media interest in Carlyle, noting that Carlyle's activities are "visible and under increasing scrutiny." To protect the Carlyle and CalPERS names, he assured the board that Carlyle is "following the highest ethical standards" by "avoiding investments in industries including tobacco, gambling and firearms."


Down the road, Carlyle's investments in Asian companies facing downsizing, manufacturers in China and military conglomerates in Turkey could present serious dilemmas. It's not hard to find contradictions: Carlyle already has investments in China, which is on the CalPERS blacklist for public stock markets, and it is gearing up for more. Liu Hong-Ru, a former official with China's central bank who sits on Carlyle's Asian Advisory Board, is a senior adviser to Petrochina, the company whose public offering CalPERS boycotted in 2000. Until last year, Carlyle was the official adviser to Saudi Arabia's offset program, which allows buyers of US military hardware to use their purchasing power to pressure companies to transfer technology and jobs to their economies. "In effect, Carlyle was telling another country how to leverage their purchases of military equipment in ways that create the most jobs in that country, not this country," said Randy Barber, an expert on offsets at the Center for Economic Organizing in Washington.



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