Largest US pension fund faces $300m to dump investments in Russia

Moscow City – view of the skyscrapers of the Moscow International Business Center. (Photo: Shutterstock)

(Bloomberg) – A debate is raging within California’s public employee retirement system over whether it should quickly exit its investments in Russia — at great cost. Last week, staffers at America’s largest public pension discussed the possibility of disposing of the holdings, a move that would ultimately require board approval. This followed California Governor Gavin Newsom’s call for state pensions to cut money off Russia after it invaded Ukraine – and send a message to the world that the country is uninvestable.

Then came the price to pay: Calpers would have to reduce its entire portfolio of listed Russian investments to zero – recently valued at around $300 million. Some senior executives said the investments would be worthless if they flagged them for hasty disposal amid tough sanctions and falling Russian asset prices, according to a person familiar with the matter.

For a fund that manages 500 billion dollars, this kind of sum does not correspond to a serious deficiency. But the internal deliberations underscore the challenges facing pension plans, endowments and business leaders across the United States as they try to respond to the growing humanitarian crisis in Ukraine. Pennsylvania Public School Employees’ Retirement System Plans to Sell Stakes in Russia and Belarus; New York City comptroller calls on five city pension funds to divest from Russia; while Connecticut’s treasurer ordered state pension funds out of Russian holdings.

A big question to Calpers: if the pension fund unloads inventory, should it do so in days, weeks or months? The answer would affect the size of the markdown, as well as the prices these assets would ultimately fetch.

On Tuesday, the debate intensified. In hallways and emails, some employees wondered about the cost of a possible quick exit, the person said. The markdown would only reduce Calpers’ reported returns by a few basis points. But if pensions can’t deliver on their promises to workers, firefighters and police, taxpayers will pick up the slack.

Imminent deadline

The fallout from Russia’s Feb. 24 invasion is rippling through global markets, including indexed investments, as companies scramble to distance themselves from the country. MSCI Inc. and FTSE Russell both removed Russian stocks from their indexes, further isolating the country.

Calpers is now reassessing whether and how quickly to sell its listed Russian holdings. Spokesman Joe DeAnda said pension fund staff don’t have the final say on the matter.

“Only Calpers’ board can authorize divestment activities,” he said.

The deadline for Calpers staff to resolve their debate is Monday, when they are expected to present a plan to their investment committee.

Over the past week, the Russian sovereign debt market has frozen, with some banks backing away from matching sellers and buyers, people familiar with the matter said. The ruble has plunged since the start of the invasion and the country’s stock market remains closed, making it more difficult for foreign investors to value their stock holdings. Several Russian banks have been cut off from the SWIFT financial messaging system.

Mall

Pensions also face a particularly tricky challenge in determining the value of their Russian private equity investments.

Calpers employees, for example, are evaluating how best to value a Moscow mall owned through a partnership with Hines, a Houston-based commercial real estate developer. Some inside Calpers questioned whether the roughly $200 million property should be reduced to zero, one person said. Others expect the hit to be substantial but potentially muted by the prospect of consumer spending picking up as the pandemic recedes, another person said.

A spokeswoman for Hines declined to comment.

How pension funds and other institutions set valuations for their most illiquid holdings at the end of the first quarter will be key in determining whether many achieve expected returns. With the release of private equity returns three months behind that of public securities, investors don’t have another quarter to try to catch up on their gains by June 30, the end of the exercise for many organizations.

Investors who specialize in acquiring second-hand fund assets from pensions and other institutions haven’t seen them try to dump their Russian holdings in the past month, people familiar with the matter said. case.

Few investors would want to be considered forced sellers. This means that even if pensions and endowments seek to distance themselves from Russia, their cash in private equity funds could be tied up in the long term.

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Dolores W. Simon