Sad End For CalPERS Private Equity ‘Golden Years’

The apparent suicide last week of Alfred Villalobos, who faced a bribery trial next month, is a sad end for a former CalPERS board member paid more than $50 million by firms seeking money from the big pension fund.

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Most of his fees came from private equity firms during the years leading up to the financial crisis in 2008. Some call the period private equity’s “golden years,” when leveraged buyouts of corporations yielded huge profits.

Villalobos flourished as a “placement agent” offering help for firms seeking investments or contracts from CalPERS, particularly after another former board member, Fred Buenrostro, became chief executive of the pension fund in 2002.

Now Buenrostro, who pled guilty to accepting Villalobos bribes, awaits sentencing in May. Pushed out of CalPERS in 2008 amid complaints of investment meddling, he received a $300,000 salary from Villalobos and possibly a Lake Tahoe condo.

During the boom years CalPERS private equity investments soared (see chart below from annual report, p. 21). Above-market returns expected from private equity help the pension fund meet its earnings forecast, said by critics to be overly optimistic.

Among several types of private equity the biggest and most profitable by far is the leveraged buyout. Loans needed to buy a company are typically obtained by using the targeted company’s own assets as collateral.

A long-running controversy over leveraged buyouts flared publicly in the 2012 presidential campaign of Mitt Romney, made wealthy by Bain private equity. Some of his Republican primary opponents called the buyouts job-destroying “vulture capitalism.”

Leveraged buyouts also have been sharply criticized by SEIU, a large and aggressive union with members in the public and private sectors. Some say corporate regulation, often pushed by public pension funds, makes private equity more attractive.

A boost for leveraged buyouts came from an analysis of 3,200 buyouts from 2000 to 2005 issued in December 2013 by researchers at the universities of Chicago, Harvard, Michigan and Maryland.

The analysis concluded “private-equity buyouts catalyze the creative destruction process, as measured by job creation and destruction and by the transfer of production units between firms.”


As the private equity boom ended with the financial crisis, a pay-to-pay scandal erupted in New York. Placement agents and private equity firms, some doing business in California, were accused of paying bribes to get public pension fund investments.

CalPERS did not know whether private equity firms were paying big placement fees for its investments. A board member who once worked for Villalobos, Kurato Shimada, chaired a committee that had blocked a staff move to require fee disclosure.

And during the boom years CalPERS was an eager private equity partner. In 2006 Los Angeles Times reporters asked CalPERS for letters, e-mails or memos from Villalobos and former state Sen. Richard Polanco about investment opportunities.

In a rejection of the Public Records Act request, a letter from a CalPERS attorney to the Times said “ the release of the (sic) some of the requested information may harm CalPERS’ ability to continue to invest with top-tier private equity funds.”

The letter said some private equity firms warned that “CalPERS’ current status as an ‘investor of choice’ will be damaged” and other private equity firms “recently expressly refused to allow CalPERS to invest with them” because of concerns about disclosure.

After the New York scandal erupted in April 2009, CalPERS adopted a fee disclosure requirement and asked private equity firms and other money managers if they had paid placement fees for CalPERS investments.

In October 2009 a CalPERS report said Villalobos and his small family firm, ARVCO, had received more than $50 million in placement fees from firms seeking CalPERS investments.

A review of placement fees ordered by CalPERS, lasting 18 months and reportedly costing $11 million, was led by an outside lawyer, Phillip Khinda, and a consulting firm. State and federal prosecutors filed lawsuits against Villalobos and Buenrostro.

Before it was all over, Shimada resigned from the board. A long-time board member and chairman of the investment committee, the late Charles Valdes, was linked to Villalbos in a number of ways and chose not to run for re-election.

A 37-year board member with the CalPERS auditorium named in his honor, the late Robert Carlson, was said to have met at Villalobos’ Lake Tahoe home in 2004 with Villalobos, Shimada, Valdes, Buenrostro and an executive of Medco, which paid Villalobos $4 million after receiving a CalPERS contract.

The top CalPERS private equity officer, Leon Shahinian, was suspended and then left CalPERS. He resisted and reported pressure by Buenrostro, but “lost his way” by accepting a Villalobos private jet trip to New York for an event honoring Leon Black of Apollo private equity.

The Khinda-led review found that in general the CalPERS investment staff, resisting pressure from Buenrostro and others, did not make improperly influenced investments that caused “substantial” losses.

But the review found that CalPERS indirectly paid for placement fees received by Villalobos and others. Private equity firms charged higher management fees to offset the cost of the placement fees, apparently raising investment costs and lowering returns.

If CalPERS funded some agent-backed investments instead of others equally qualified, said the review, there may have been no direct losses. But CalPERS would have been harmed if capable managers thought the process was unfair and didn’t apply.

The review said “one of the most troubling discoveries” was that placement agent fees were being paid by Apollo and other money managers that already had strong ties to CalPERS.

In these cases, the review speculated, the placement agent fees may have been paid as “insurance” against the placement agents using their connections against the firm, risking the loss of investments or contracts.

CalPERS responded to the scandal by sponsoring legislation requiring placement agents to register as lobbyists and banning contingency fees based on the amount of the CalPERS investment.

Several of the big firms that used placement agents agreed to $215 million or more in CalPERS fee reductions. A number of CalPERS actionswere taken to insulate investments from improper influence.

In September 2011 CalPERS began a five-year private equity “strategic plan” to cut costs, reduce complexity, focus on regulatory compliance and create a new in-house system for accounting and reporting.

An annual CalPERS report last month showed that private equity is still yielding above-market returns: 20 percent for the year ending last June 30 and 12.4 percent over the last 20 years.

Buyouts were 61 percent of the total private equity portfolio valued at $31.3 billion, followed by “growth-expansion” style funds at 17 percent and “credit-related” at 12 percent.

“Buyouts will continue to be a large component of our portfolio going forward, as the returns have met our expectations,” Scott Jacobsen, CalPERS senior portfolio manager, told the investment committee.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at


  1. Can the public demand those on the Board of Directors together with the employees who are responsible for private investments open their Checking & Savings accounts.

    Just think how rich Pers would be if they just bought into the Dow Jones averages. Instead of earnings in the neighbourhood of 20% for 2013 they could have boosted of 35-40% with little or no expense.
    GOD SAVE AMERICA &. God help those expecting a pension after the year 2025 for there shall be no Assets in the portfolio

  2. Another swamp that needs to be drained, exposing the mud-suckers to daylight.

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