PSERS Board Divides Over Crypto Investors, Real Estate Sales

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Trustees of Pennsylvania’s more than $70 billion public school employee retirement system, which has six new members since last year, formed new coalitions Thursday and Friday in split votes on investments recommended by PSERS staff.

The board, with 14 members so far, has approved a proposal to invest up to $130 million in Insight Partners XIII, an early-stage venture capital fund targeting info startups -technology and the internet of things, but only by a narrow margin, with six of the directors voting no.

PSERS had voted to commit $450 million to five previous private equity funds managed by New York-based Insight Partners since 2018. PSERS staff cited those investments and expected future earnings when presenting the latest Insight fund to the board in a series of meetings since last year.

But not all trustees were convinced. So far, the publicly funded plan has recouped modest initial returns of $43 million for that $450 million Insight commitment, according to the most recent data posted on the PSERS website.

Certainly, Insight estimates that the private company shares it still holds for PSERS in these five funds are worth over $600 million, enough to ensure a comfortable profit if they can be cashed in at that level in the next few years. an open question, with VC-related deals falling in the recent cold investment environment.

During the meeting, Trustee Stacy Garrity, the states’ elected treasurer, cited three reasons for opposing the investment: Insights challenged performance, which it said was below average, and sometimes in the bottom quarter of similar funds, for systems the three most recent Insight investments. ; Insights’ explanations for his investment in fraudulent cryptocurrency exchange FTX, which Garrity says do not inspire confidence; and operational and governance concerns, which she did not detail.

Insight officials did not respond to calls seeking comment.

Among its many investments, Insight invested $40 million in FTX in July 2021. FTX’s value plummeted when the government seized the company and arrested founder Sam Bankman-Fried for fraud last fall. Insight always describes crypto in its marketing materials as a clear breakout sector despite high volatility.

Despite its relatively weak returns to date, Insight has collected significant fees from the PSERS.

For 2021, for example, Insight Venture Partners X, LP, where PSERS invested $100 million in 2018, claimed $70.6 million, more than all of Insight’s payouts to PSERS up to that point. that time, because his share of the unrealized PSERS profits in the companies he supported, through an arrangement called PSERS, bore interest.

This type of profit sharing for successful investment entrepreneurs, which has helped private managers amass huge personal fortunes at low tax rates, has been controversial. The U.S. Securities and Exchange Commission reviewed those arrangements, and a PSERS administrator, State Sen. Katie Muth (D., Montgomery), sued the agency in a still unsuccessful effort to force disclosure of the language. secrecy of payment provisions in its investment contracts.

Joining Garrity in voting no on Insight were his two Republican colleagues on the PSERS board, Rep. Torren Ecker (R., Cumberland) and newly appointed Sen. Greg Rothman (R., Cumberland) with Muth; a representative from Nathan Mains, who heads the Pennsylvania School Boards Association, whose members share the PSERS public cost of more than $5 billion a year with state taxpayers; and Chris Santa Maria, president of PSERS, who plans to retire from the unpaid post later this year.

The Insight investment was approved nonetheless, with Santa Marias four other PSEA teachers’ union members on the board joining frequent allies Eric DiTullio, a school board representative, and state Rep. Matt Bradford ( D., Montgomery) as well as representatives of Governor Josh Shapiros from the education and banking departments, who gave Insight the necessary votes for approval.

This contrasts with Governor Tom Wolfs’ appointments to the board, which in disputed votes more often opposed private investments such as Insight. One of Wolfs’ appointments, Richard Vague, is due to return to the board later this year as Shapiros’ representative.

Two other investments were easily approved. The board voted to invest $200 million in PIMCO Commercial Real Estate Debt Fund II and an additional $200 million in LS Power Fund V, with all in favor except Muth, who abstained.

But directors split on somewhat different lines in a vote to get rid of another investment. Under chief investment officer Ben Cotton, appointed last year, the board attempted to sell around $1.4 billion in direct real estate investments, some acquired in the 2010s and others much longer. early, despite a history of losing money in similar transactions in the past.

On Friday, staff proposed that the PSERS sell a 20-acre property adjacent to the struggling Galleria mall in Fort Lauderdale, Florida. PSERS hopes to raise at least $20 million for the plot, which it has already tried to sell or develop.

Five administrators opposed the sale: Garrity, Mains, the two state senators, and Brian Reiser, a Grove City math professor.

Rothman previously ran his family’s real estate company, whose clients included state agencies such as Pennsylvania Turnpike and PennDot. He did not return a call to comment on his opposition to the sale.

Garrity, in a statement, said she was in favor of selling all direct real estate, but added that she believed the agency could get a better price by bundling existing properties.

As The Inquirer previously reported, though PSERS did not confirm, Florida County real estate offices and local trade publications late last year and early this year reported the sales. to multiple owners of four apartment complexes formerly owned by the agency, for a total of at least $363 million.

PSERS has struggled to sell other properties, such as the Atlanta Airport Marriott. Documents obtained by The Inquirer show that PSERS staff expect the hotel is unlikely to fetch a price above the $57 million the agency paid in 1987. Staff indicated the value of Galleria Malls at less than $100 million, less than a third of its former valuation. . (Adjusting for inflation, the two hotels are worth even less, compared to what the PSERS has invested in them.)

The agency is also in talks to hire a manager for three blocks of surface parking lots and the rubble-strewn former sites of two print shops it demolished as part of an aborted redevelopment project in downtown Harrisburg, New York. east of its own offices.

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