Public employees doubt CalPERS’ private equity push

By Devara Berger, Special for CalMatters

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Public employees’ retirement security depends on the integrity of the California Public Employees’ Retirement System (CalPERS). However, its CEO, Marcie Frost, is steering the fund into a high-stakes gamble on private equity and private credit, pushing exposure toward 17%. While Frost frames this as a turnaround, a closer look reveals a pattern of misrepresentation and hidden fees designed to enrich Wall Street at the expense of Californians.

Facing low returns and a multibillion-dollar funding deficit, CalPERS shifted from stable traditional assets to an aggressive alternative model. This overhaul raised its private equity target allocation to 17% and established an 8% eventual target for its newly introduced private credit portfolio.

Unlike public stocks with transparent prices, private equity assets are valued by the managers who run them. Managers use internal formulas to estimate what a company might be worth, rather than what someone is actually willing to pay for it today. 

By updating values infrequently, private equity managers “smooth out” market downs. This creates an illusion of stability, allowing Frost to report “strong” returns even when the broader economy struggles.

While high-risk markets can deliver notable gains, they come with substantial drawbacks. Chief among them is an alarming lack of transparency. 

Labor coalitions and retirement associations recently pushed for transparency through Senate Bill 1319, The Private Equity Sunshine Act. It would have mandated public benchmarking and asset disclosure. 

CalPERS mounted an aggressive misinformation campaign to kill the bill. It claimed increased transparency would trigger billions of dollars in lost returns and necessitate sharp employee contribution hikes. This speculative and questionable narrative helped kill the bill. The result is CalPERS keeps members blind to structural risks until major losses arise.

Furthermore, Frost’s claims of outperformance are often built on shifting goalposts. CalPERS often compares private equity performance against specialized private stock indices rather than the S&P 500. Over the last five years, simple, low-cost public index funds have frequently matched or beaten CalPERS’ expensive private equity portfolio — without charging multibillion-dollar fees.

Then there’s the fact that private equity valuations lag public markets by three to nine months. When the stock market crashes, private equity valuations stay artificially high for months. Frost often uses this window to claim “outperformance,” effectively taking credit for a delay in bad news.

Frost has publicly stated that CalPERS wants more data from its partners and boasts how transparent CalPERS is. But at the same time, CalPERS continues to shield Limited Partnership Agreements from the public. The truth is, you can’t have it both ways. These private agreements often contain hidden fee structures or terms that the public — even the CalPERS Board — never see. 

What Frost doesn’t discuss is that CalPERS adopted a “total portfolio” approach which depends heavily on private equity investments, an approach CalPERS is eager to protect. 

CalPERS has created a massive wealth transfer from public servants to Wall Street. While Frost claims to have cut management fees, these “savings” are often eaten up by “carry” (or performance) fees and administrative costs that remain shielded. 

If these mirage returns fail to materialize, it is the public employees who face potential benefit cuts or increased contribution requirements. Mediocre or huge losses don’t bother Frost, who continues to collect huge bonuses and salary increases while CalPERS lags behind other pension systems. 

It remains underfunded at 79% and carries $179 billion in unfunded pension liabilities.

Public employees are being told a story of “specialized approaches,” but the reality is it faces high fees and returns that struggle to beat a basic index fund. When the person managing your money refuses to show you the contracts, it isn’t “private” investing — it’s a lack of accountability. 

CalPERS members should demand full disclosure of all fee agreements. Our retirement security is too important to be left in the dark.

This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.