Dean Dennis to STRS Board: Why are we allocating capital to risky investments burdened with high fees and subpar performance?

Dean Dennis' Comments to STRS Board

March 21, 2024  

March 21, 2024 - Dean Dennis 35 years Cincinnati Public, President of ORTA and member of the STRS Ohio Watchdog and Ohio STRS Members Only Forum. 

With minimal research, Board members should be able to conclude that investment managers lose to the market roughly 90% of the time. No investment staff can beat the market every year. Not even our investment staff, although every year they seem to beat their benchmarks, supposedly tied to the Market. Interestingly, our investing trend is to move away from transparent investments tied to the market, such as Domestic Equity investments, and move towards opaque Private Equity Investments. In 2005, 46% of our investments were in transparent Domestic Equities now only 26% of our investments are in Domestic Equities. In 2005 only 2.6% of our investments were in opaque Alternative Private Equity/Opportunistic investments, now over 20% are in such investments. 

Private Equity investments are fraught with non-disclosure agreements and hidden fees. Their performance is sheltered from being audited by pension Board members. This allows the General Partner of PE investments to mask its performance from their Limited Partners. This is a good deal for the General Partner because they essentially can grade themselves and inflate their performance. This can become a good deal for the Limited Partner because this inflated grade passed on to the Limited Partner, is then passed on to their Board members who approve bonuses. The million-dollar question however is, how do the members of the pension plan benefit from the General Partner and Limited Partner relationship? Spending money on the Benchmark Services lawsuit needs to be questioned. 

Trustees, with minimal research, you’ll learn Private Equity investments aren’t what they are advertised to be, they peaked nearly a decade ago. When you account for their high fee structure, actual performance, and risks, you’ll rethink their value to our portfolio. 

Let’s look at PE investment’s “2 and 20” fee structure. After we commit our capital to the investment, the General Partner charges us a 2% annual fee to manage our investment. When liquidating the investment, the General Partner is entitled to a 20% performance fee skimmed off the top. But, let’s look at just the 2% fee. 

In 2005, STRS had 2.6% of our monies, or, $1.5 billion, in PE’s investments. This added up to STRS sending about $30 million in investment fees to Wall Street. STRS has over 20% of our monies, or roughly $18 billion in PE investments. Today we send roughly $360 million in fees to Wall Street. Note, $360 million annually sent to Wall Street equates to nearly $3 billion over a 30-year-funding period, money we could have used towards restoring benefits. 

So, trustees, why are we allocating capital to these risky investments, burdened with high fees, and subpar performance? Incidentally, PE investments accounted for nearly 16% of all bankruptcies in the United States last year. I believe we hold nearly 130 such investments.

Dean Dennis is currently president of the Ohio Retirement for Teachers Association.