Pensions Pressed: Invest Locally

Politicians and pension fund insiders in Maryland and Massachusetts have put pressure on their respective states to invest their pension locally to boost their economies.

But in Maryland, an initiative by the State Retirement and Pension System of Maryland to increase the private equity exposure in its pension has been met with some criticism from one local VC who advises the government on high-tech economic development. Frank Adams, managing general partner of Grotech Capital Group, told the Baltimore Business Journal that investing in Maryland-based private equity firms was “the only way to get the double bang” of pension returns and local economic development. Adams did not return calls seeking comment.

So far, the Maryland State Retirement System has committed $16 million to London-based Alchemy Partners; $13 million to London-based Apax Partners’ Apax Europe VI: $40 million to Boston-based Audax Group’s Audax II; and $15 million to Seattle-based Frazier Healthcare Ventures’ Frazier Healthcare V.

Steve Huber, Maryland’s chief investment officer, says that there are no planned changes in the way funds are chosen. Huber points out that for most of its investments, the system uses consulting firm Altius Associates to make investments indirectly and has only recently began direct private equity investments as an LP. “There is not currently a policy to target just Maryland-based funds,” Huber says. “Our strategy is national and international on private equity.”

Up the Atlantic Coast in Massachusetts, State Treasurer Timothy Cahill has proposed an ambitious plan that would see pension funds used to power economic development in the Bay State. The proposal is one of several the treasurer made public on May 4 and stems from recommendations of the Treasurer’s Job Growth Task Force. The proposal would use up to an additional $600 million of pension investments to promote “affordable housing and economic development in Massachusetts.” Almost half of Massachusetts’ $36 billion pension fund is managed is managed by Massachusetts-based firms, according to the treasurer’s office.

Don’t Act Locally

But the message from an expert who wrote a detailed study on private equity investment says that such policies are often flawed.

Keeping pension fund money in-state could prove costly when it comes to private equity investment, says Josh Lerner, a professor who specializes in private equity at the Harvard Business School.

Lerner says that using pension funds for economic development presents an easy road for politicians. For example, by getting the state pension to invest locally, there’s no need to raise taxes to fund entrepreneurial activities. And, the negative effects of lower pension returns won’t be felt for a while. “The problem has become more intense as states face the challenges of tight budgets and desires to enhance revenue,” Lerner. “It’s not a temptation to want to fall into.”

He also says that in a lot of cases, once there’s pressure to invest locally, the pensions are pressured to invest in certain politically connected funds.

“Even if there’s not that pressure there’s a sense that the standards are considerably lower,” he says.