Adding to the fervor surrounding sovereign wealth funds, lawmakers in California are attempting to bar two of the country’s largest pension groups from investing in private equity funds and firms partially or wholly owned by sovereign wealth.
In the eyes of the man who has introduced the legislation, Alberto Torrico, it is vital to ensure the California State Teachers’ Retirement System (CalSTRS) and the California Public Employees’ Retirement System (CalPERS) funds are not associated with certain sovereign wealth funds, who he claims are tied to governments with records of human rights abuses.
While the proposed legislation does not single out any firms or sovereign wealth funds, it’s pretty clear that the bill has Carlyle and Apollo in mind, both of which have recently sold stakes to entities from the UAE. Torrico says the UAE in particular is not up to snuff on human rights, and that therefore California should flee investments tied to the region much as it has investments tied to Sudan.
This guilt by association, if turned into law, could have far-reaching consequences for private equity real estate GPs and the LPs they serve.
CalSTRS, which last night voted to oppose the bill, estimates the California legislation could cost the pension $5.3 billion in potential lost revenue over five years.
California is not alone in their attempts to regulate sovereign wealth funds. The European Union and the International Monetary Fund are both proposing voluntary guidelines governing sovereign fund investment activities.
Meanwhile the chief executive officer of Canada’s second-largest pension plan, Canada Pensions, has warned US legislators against introducing rash protectionist laws. Without real care, he said, appearing before a US House Financial Services Committee taskforce, pension funds such as Canada Pension could be inadvertently labeled sovereign wealth funds.
Opponents of anti-SWF rules argue that the free flow of cross-border capital is vital to the preservation of not just the Canadian and US economies, but the world as a whole.
With just 20 state-backed sovereign funds collectively controlling $1,900 billion to $2,900 billion in global assets, sovereign funds are becoming increasingly important in the private equity real estate and private equity market. Trying to avoid their growing influence will be extremely difficult.