The Billionaire Express

Minnesota has funneled $ billions in fees to billionaires without reporting any of it

I don’t know about anyone else, but I have been waiting anxiously for the Minnesota State Board of Investments to publish its annual report for the fiscal year ended June 2023. They are a couple of months behind schedule, so I’m hoping the delay is because they have been working on some enhanced disclosure. Hard to believe, for a report that the prior year ran to 186 pages.

The thing is, though, that the MSBI is masterful at overdisclosing to obfuscate rather than to educate. They make you work pretty darn hard to uncover what you have a right to know.

Take fees, for example. On page 170 and 171 of last year’s report, we get a detailed breakdown of fees paid to asset managers. Over $92 million in total, and it looks like we paid our International Equity managers the most - over $5 million in 2022 went to The Rock Creek Group LLC, and nearly $7 million went to Record Currency LLC. We can see payments for every single manager - but from this page, we have no idea how much money each of them is managing. Without that context, it is impossible to make a judgment about whether it is actually a lot or not.

So I sat down with a spreadsheet and tried to add AUM (assets under management) for each of them. Took a while. I had to go back and forth between different pages to add AUM to each manager, and then add up the total to get….$77 billion? The total was missing about $22 billion - which brings me to the Private Markets portfolio and the billionaires.

Having a healthy allocation to Private Markets has been central to the SBI’s strategy for years. Most of the time it seems to work out pretty well, although I gotta say, for the past 5 years, US Equities have crushed Private Markets, 15.3% to 12.6% for the period ending 12/31/23. Go back 10 years, and Private Markets come out ahead - but not by a lot, 12.3% vs 11.4%.

And that brings us to the fees. The MSBI does not report them. They will tell you, of course, that providing the same level of detail as for public markets would violate their contracts. Secrecy is very important to PE billionaires. Still, there seems to be no reason why they cannot provide summary information - but they don’t.

So I continued working on my spreadsheet, and tried to estimate total fees paid to our Private Market Managers. The basic math works like this - the Managers get 1-2% in management fees for each Fund the MSBI participates in. I don’t know that for sure - I’ve never seen any of their contracts, but that would be pretty standard. LPs like the MSBI also pay administrative fees, which I am guessing are around 15 basis points a year. Finally, managers also typically get around 20% of the gains - that’s called “carried interest” - what an innocuous sounding term!

Of course, I only have the information they disclose in their quarterly meetings, and in the now-long-delayed annual report, but here are the facts. At June 30, 2022, total private markets investments stood at about $22 billion. Since these are long-term structures, taking as much as 10 years to return profits, I’ve assumed a distribution of 10%, or about $2.2 billion. I also assumed we doubled our money - honestly, not that great, if you are only doubling your money over 10 years, so this will be a conservative fee estimate.

I am showing dollars here in thousands - so that is nearly $600 million in fees just for one single year. The MSBI has been investing in private markets for years, so I think it is pretty safe to say that we have paid Billions of $$$ to managers of the private markets portfolio.

But the returns! What about the returns?! Well - not for the past five years. And pretty modest for the past ten. And none of this takes into account the negative impact that PE has had on the Minnesota economy. The SBI has heard from tenants in Minnesota who have been negatively impacted by the Private Equity owners of their buildings. In fact, the MSBI even pulled a $100 million recommendation for Landmark Partners, one of the offending firms, after tenants complained at the August Board meeting. Of course - the MSBI came back on December 1, 2021, and approved the investment.

In November 2023, the Attorney General of the state of Minnesota hosted a CLE titled “How Is Private Equity Impacting Grocery Retail Markets?”. In the description of the event, they stated:

Private-equity firms own nearly twenty percent of the United States’ total corporate equity. This means there can be less transparency into the actions of a company when public companies are made private. It can also mean more focus on short-term profits versus the long-term health of a company’s bottom line.Join us for a panel discussion that will cover private equity’s growth as an industry, why private equity’s growing control over grocery retail raises competition and consumer protection concerns, and how private equity’s growth has potential to impact local businesses and consumers.

How, indeed. The left hand seems disinterested in what the right hand is doing.

We could go further with this exercise - this is just what I sort of vaguely remember. But the point is, we shouldn’t have to. the MSBI should be disclosing the fees paid to everyone on board the Billionaire Express, and they should also be telling us the impacts that they have had on the state and its taxpayers. We have a right to know, and they have an obligation to tell us.