Siedle: Red Flags Pepper RI Pension’s Investment In Governor Raimondo’s Venture Fund
Sunday, February 05, 2017
The pension fund made the $5 million investment in the Point Judith Venture Fund II ten years ago while Raimondo was a Point Judith general partner—four years before she successfully ran for state Treasurer and became the chief fiduciary of the state retirement system.
For years Raimondo has claimed to be a successful venture capitalist and she has indeed done well for herself, having reportedly made approximately $1 million off the state pension thanks to the high fees—among the highest paid by the fund— the pension paid her.
Further, unlike the state which paid millions for its shares in the fund, the Treasurer was granted ownership interests for free.
The state pension would have been well-advised to steer clear of this politically-charged investment and should have heeded warnings.
The state's investment posted a negative 2.9 percent return through December 31, 2016, according to the most recent performance figures from the Treasury.
To make matters worse, in late 2016 Point Judith notified the Treasury that it intended to exercise the first of two, one-year options on the state's investment.
Will a final accounting of the Point Judith investment will be delayed until after the next election?
“Clearly they haven't been our best performer," current Treasurer Seth Magaziner said in an interview in November.
Magaziner further conceded such small investments don't make much sense for the pension system, as the potential returns don't match the demands on staff to monitor them.
"I would not do an investment of that size today," Magaziner reportedly said.
What young Magaziner isn’t saying is how much would the Raimondo investment be worth if sold today—assuming it could be sold.
Raimondo and her successor Magaziner have both obscured Point Judith performance for years.
Here’s what my firm had to say three years ago about the strikingly divergent performance claims regarding the pension’s investment in the Raimondo-managed fund:
“In a Power Point presentation provided to us by Treasurer Raimondo, the investment performance of the Point Judith I and II funds, as well as the performance of investments made by the professionals at the firm prior to joining Point Judith is presented. However, all such performance information has been redacted.
Thus, we do not know either the performance information provided by Point Judith to the state pension in connection with the Point Judith II investment, or whether the information provided to the pension was, in fact, accurate. If inaccurate, the Treasurer’s office may be withholding information from the public regarding potential violations of law.
Nevertheless, Treasurer Raimondo has made numerous public statements regarding the performance of the Point Judith II fund, as well as released summary performance figures which are strikingly divergent.
22 Percent Return: In an April 5, 2013 interview, Treasurer Raimondo stated that the Point Judith II investment was reviewed for ERSRI by the pension’s private equity consultant at that time. Further, the performance of Point Judith at that time was, according to the Treasurer, top quartile in 2007.
“It’s a strong performer. They’ve produced strong returns. It’s still a little bit early. Those kinds of firms have a 10-year investment life cycle, so they’re maybe halfway through the cycle,” she said.
Treasurer Raimondo went on to state, “As I suspected they have solid performance, a realized return of 22% – so a 22% realized return, but again, they’re halfway through the fund. Early returns are strong, but like any of these private equity holdings, you have to wait until the fund is done to see how they’ve performed.”
12 Percent Return: On April 9, 2013 it was reported that the Treasurer’s spokeswoman provided a correction saying the Point Judith II fund “has a 12% return; 22% is the amount that has been cashed in.”
Obviously, there is a massive difference between a 22 and 12 percent return.
10.9 Percent Return: In a May 2, 2013 interview, the Treasurer’s office stated that the Point Judith II had an annualized rate of return of 10.9 percent as of June 2012.
6.2 Percent Return: On October 10, 2013, the Treasurer’s office stated Point Judith II had an annualized internal rate of return of 6.2 percent.
4 Percent Return: In response to our request for complete information regarding the Point Judith II fund, we received from Raimondo severely limited performance information which simply stated quarterly capital account values and internal rates of return.
Without a schedule of contributions and distributions and audited financials indicating the fund’s portfolio holdings and their values, it is impossible to verify any of Treasurer Raimondo’s claims regarding the fund’s performance, or to independently calculate such performance with any certainty. However, based simply upon the incomplete data provided, it appears that the annualized returns are significantly less than the 22 percent, 12 percent, 10.9 percent or 6.2 percent represented by the Treasurer.
In fact, our best estimate of approximately 4 percent will compound to less than what has been delivered by the traditional equity markets due to the extremely high volatility. Furthermore, market investments would have involved significantly lower fees and risk than this venture capital investment.
-16.7 Percent Return: On July 12, 2013, summary data provided by the Treasurer to GOLOCAL PROV revealed that “in the four-year period the performance of the fund has been weak.”The cumulative rate of return of the fund was calculated to be -16.7 percent by an expert commentator.
In our opinion, in order to prevent any possible confusion or misleading of investors, it is appropriate to refer this matter to the SEC for investigation.”
In closing, recall Raimondo’s words:
“These kinds of firms have a 10-year investment life cycle.”
“You have to wait until the fund is done to see how they’ve performed.”
Apparently, with regard to the investment performance of this politically-charged investment, Rhode Islanders are going to have to wait a year or two longer.
Related Slideshow: Timeline - Rhode Island Pension Reform
GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform.
Governor Don Carcieri makes pension reform a top priority in his emergency budget plan. His three-point plan included:
1. An established minimum retirment age of 59 for all state and municipal employees.
2. Elimination of cost-of-living increases.
3. Conversion of new hires into a 401(k) style plan.
See WPRI's coverage of Carcieri's proposal here.
Rhode Island increased mandatory employee contributions for new and current employees. New Mexico was the only other state to mandate current employees to increase their contributions.
Read the NCSL report here
(Photo: FutUndBeidl, Flickr)
Rhode Island's state administered public employee pension system only held 48% of the assets to cover future payments to its emplyees.
"This system as designed today is fundamentally unsustainable, and it is in your best interest to fix it" - Gina Raimondo
Check out Wall Street Journal's coverage here.
Gina Raimondo defeats opponent Kernan King in the election for General Treasurer of Rhode Island using her platform to reform the structure of Rhode Island's public employee pension system. She received 201,625 votes, more than any other politician on the 2010 Rhode Island ballot.
Raimondo leads effort to reduce the state’s assumed rate of return on pension investments from 8.25 to 7.5%.
Her proposal includes plans to suspend the Cost of Living Adjustment (which allows for raises corresponding with rates of inflation for retirees), changing the retirement age to match Social Security ages, and adding a defined contribution plan.
Raimondo releases “Truth in Numbers”, a report detailing the pension crisis and offering possible solutions. She continues to work to raise public support for her proposal.
"Decades of ignoring actuarial assumptions led to lower taxpayer & employee contributions being made into the system." - Gina Raimondo (Truth in Numbers)
Read GoLocalProv's analysis of the report here.
Read the Truth in Numbers report here.
Governor Lincoln Chafee and General Treasurer Gina Raimondo present their pension reform legislation proposal before a joint session of the General Assembly.
“Our fundamental goal throughout this process has been to provide retirement security through reforms that are fair to the three main interested parties: retirees, current employees and the taxpayer…I join the General Treasurer in urging the General Assembly to take decisive action and adopt these reforms.”- Gov. Lincoln Chafee
Head of Rhode Island firefighters’ union accuses Raimondo of “cooking the books” to create a pension problem where one did not exist. Paul Valletta Jr. states that Raimondo raised Rhode Islanders’ assumed mortality rate to increase liability to the state, using data from 1994 instead of updated information from 2008, and lowered the anticipated rate of return on state investments.
“You’re going after the retirees! In this economic time, how could you possibly take a pension away?” Paul Valletta Jr (Head of RI Firefighters' Union)
Read more from the firefighters' battle with Raimondo here.
Check out the New York Times' take on RI's pension crisis here.
November 17, 2011
The Rhode Island Retirement Security Act (RIRSA) is enacted by the General Assembly with bipartisan support in both chambers. RIRSA’s passing is slated to reduce the unfunded liability of RI’s pension system and increase its funding status by $3 billion and 60% respectively, level contributions to the pension system by taxpayers, save municipalities $100 million through lessened contributions to teacher and MERS pension systems, and lower the cost of borrowing.
Read more from GoLocalProv here.
November 18, 2011
Governor Lincoln Chafee signs RIRSA into law. According to a December 2011 Brown University poll, 60% of Rhode Island residents support the reform. Following its enactment, Raimondo holds regional sessions to educate public employees on the effects of the legislation on their retirement benefits.
Read about how Rhode Islanders react to RIRSA here.
Raimondo hosts local workshops to explain the pension reforms across Rhode Island. She also receives national attention for her contributions to the state’s pension reforms. The reforms are given praise and many believe Rhode Island will serve as a template for other States’ future pension reforms.
Read about the pension workshop here.
Read Raimondo's feature in Institutional Investor here.
March - April 2012
Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.
December 5, 2012
Raimondo publicly opposes Governor Chafee’s meetings with union leaders in an effort to avoid judicial rulings on the pension reform package. In response, Chafee issues a statement supporting the negotiations.
Read more about Raimondo's opposition here.
Read about Chafee's statement http://www.golocalprov.com/news/new-chafee-issues-statement-supporting-pension-negotiations/">here.
Led by the Rhode Island State Association of Fire Fighters, unions protest the 2011 pension reform outside of the Omni Providence where Governor Lincoln Chafee and General Treasurer Gina Raimondo conduct a national conference of bond investors.
Read about Raimondo's discussion of distressed municipalities here.
The pension plan comes under increased scrutiny as a result of the involvement of hedge funds and private equity firms. Reports show that $200 million of the state pension fund was lost in 2012.
"In short, impressive educational credentials and limited knowledge of investment industry realities made Raimondo ideally suited to champion private equity’s public pension money grab." - Ted Seidle (Forbes)
Read GoLocalProv's coverage of the State Pension Fund's losses here.
Read Ted Seidle's criticism of Raimondo in Forbes.
Reports show that the State’s retirement system increased in 2013 by $20 million despite the reforms being put into effect the previous year.
Read GoLocalProv's investigation into the rising pension costs here.
Matt Taibbi publishes an article in Rolling Stone detailing Raimondo’s use of hedge funds as a questionably ethical tool to aid with pension reform.
Read Taibbi's article in Rolling Stone.
Read GoLocalProv's response to Taibbi here.
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