Private Equity’s Pension Heist
Public pension funds’ investment in private credit has soared, but it’s ever harder to tell where the money is flowing. The winners are private equity firms, who take advantage of our pension pots while hiding their activities, and fees, from view.
Of the first billion in seed money it raised, $300 million in Joshua Kushner’s Thrive Capital came from a CalPERS investment, that is, from California’s state pension fund. (David Paul Morris / Bloomberg via Getty Images)
From 2024 to 2025, the two hundred largest pension funds in the United States increased their investment in private credit by 57 percent. It’s now gone up around 650 percent over the past five years. Private credit is the other side of the coin to private equity (PE) — among other things, it provides the loans for PE firms’ leveraged buyouts. The biggest PE firms have massive private credit arms that have, in recent years, overrun their private equity cores. They act as the unregulated winners of the postrecession economy, avoiding scrutiny and taking risks that commercial banks were foreclosed from under the Dodd–Frank Act.
Our worker-funded public pensions have historically been the primary capital provider to private credit funds, amounting to around 30 percent of the total market. Many of these same private credit funds have found themselves in a world of trouble over the past twelve months, just as public pensions have loaded them up with increasing capital. The chief investment officer at New York City retirement systems recently told the Financial Times, “We have completely committed to private credit, we are willing to trade illiquidity and complexity for a higher return.”
As is the case in all investing, higher ceilings come with lower floors. Credit defaults, according to Fitch ratings, are hitting record highs and nonaccrual status loans, i.e., ones where borrowers are in serious trouble, spiked 40 percent since this March. In response to these issues on the borrower end, private credit funds have extended their lockup period, put hard-line caps on redemptions to prevent runs on capital, and opened up investment to 401(k) holders and individuals to increase capital inflows.
It’s unclear whether we have a total crisis on our hands, in part due to shady reporting standards at pension funds, but it is clear that we have a real problem in private credit regardless. The issue is downstream of the problem in private equity where holding periods are up, and by extension, the net asset value (NAV) of funds held over seven years (sometimes referred to as “zombie funds”) has doubled since 2021. They can’t sell the asset, so they build continuation vehicles to recapitalize and hide the struggle that’s going on. But the real risk of this slowdown weighs on retirees, current and future.
When it comes to pension funds, the fees charged by private credit and alternative investment writ large (hedge funds, real estate, and private equity) are unknown to the public. They are also not Freedom of Information Act–eligible, due to bogus trade-secret protections claimed by local governments. That means workers are barred from understanding what their own contributions are going toward.
Even if we don’t have smoking guns, instead we have mounting circumstantial evidence that our public pensions are robbed of investment returns by the growth of alternative asset investing and the dark hole of management and performance fee structures. In explaining this problem, the new film Pension Fight Club offers a good, but at times awkwardly laid-out, documentary for those interested in deciphering the relationship between workers’ capital and the excesses of finance capital.
Impasse
The story of the documentary is twofold: the first being the misrepresentation of investment fees by public pension funds due to either ignorance or quid pro quo exchanges between investment consultants and political officials. We have the example of the Minnesota public pension fund that, following Ted Siedle’s investigation, shifted their investment fee total from $11 million to $188 million across a three-year period. What pension funds often do is report on the fee for assets under management but not the performance fee or the carried interest. That is, after surpassing a set hurdle rate, alternative investment managers take somewhere in the range of 20 percent of profits thereafter. Pension funds don’t count that as investment fees despite the fact that it eats into their rate of return. What’s more: if a pension fund commits $100 million to an alternative investment manager, they pay them for total assets under management, not assets deployed — so, $30 million might sit idly while the pension fund paid a premium for the full amount to be actively managed.
The second is the bigger picture: that is, the political economy of public pensions. From political donations to stack the board to investment decisions, public pensions operate in a world of information asymmetry. Those on the inside understand its influence, and everyone else is not let in on the potential costs of pension investment underperformance, the risk of complex exposure, and the behind-the-scenes nature of decision-making. From 2001–2023, fully 99 percent of pension plans failed to meet their assumed rates of return over that period in the aggregate. That means that actuarial calculations of what these funds owe are misunderstood at best and severely underestimated at worst.
Despite this overreporting of assets on hand, cities are still spending increasing portions of their budgets paying down pension debt. Sarah Anzia, leading scholar on public pensions, found that over a quarter of US cities and counties more than doubled their nominal pension expenditures between 2005–2016 alone. The context, however, is an era of underfunding, punting, or kicking the can down the road on pension contributions and “looting the funds” amid the aftermath of the Great Recession. Still, Anzia’s findings back the concern of the film, demonstrating that public pension troubles are not quite ubiquitous, but they’re intractable once felt.
Pension Fight Club traces the impasse facing public pensions. It portrays a dilemma, over whether these funds reveal their exposure to alternative investments and the fees they pay for them or else continue to kick the can down the road as economic conditions tighten. The film depicts the political incentives, bribes, faux policy fixes, and shrouded accounting that make public pensions both the willing and unwitting prey to the new Wall Street — as explored in Brett Christophers’s 2023 book, Our Lives in Their Portfolios.
Still, it’s also true that this documentary stumbles in narrativizing a complex story. It jumps from one fund to another, and their struggles with opaque investment policies but leaves the viewer too attached to a singular node, Ted Siedle, as he investigates fund policies — when a larger story could have been told about unions’ (collective) struggles to direct capital investment. It’s a story that is itself complicated enough, showing that finance fixed almost as many issues as it caused unions historically, and can be followed through the work scholars like Michael McCarthy and Brian Judge. In any case, the documentary brings important attention to public pensions and what the years ahead may have in store considering how they invested after the recession.
Uphill Struggle
Strapped with steep investment losses, surging unfunded liabilities, a shrinking public workforce, and cash-strapped local governments following the 2008 crash, public pension funds wanted out of a hole, fast. Distressed assets flooded the market and private equity, real estate investment trusts, and private credit were there to sweep it up in multifarious, intersecting mechanisms, front the costs, and offload the risk to creditors or the governing bodies they were purchasing from.
In this regard, it’s useful to take another look at Christophers’s chapter on the infamous sale of Chicago’s parking meters and underground lots to Morgan Stanley, which resulted in an immediate cash drain on the city. Still, what Christophers’s account misses is that the Illinois Municipal Retirement Fund (IMRF) — the largest in the state — in the prior year’s (2007’s) disclosures, reported over $100 million invested in a Morgan Stanley real estate fund and $17 million in their public stock. The dots don’t always connect in a straight line, but the same story is now decades old: public pensions are funding their own gravediggers. These investments routinely grow the wealth of right-wing, anti-union oligarchs and their corporate monopolies.
The fight in Pension Fight Club is as much against the alt-investment managers’ operations as it is the uphill battle to convince the public, especially those without pensions, that banal local pension policies matter. Pension funds are no longer bundled up in fixed-income municipal bonds and Treasuries. Nor are they simply overexposed to equities, which they are and were in the lead-up to 2008. Public pensions acted as the underwriters to an absurd new class of private equity multimillionaires and billionaires — the new power brokers on Wall Street and Silicon Valley.
When the Los Angeles Lakers sold to a venture capital consortium recently for a jaw-dropping $12.5 billion, it was a final signal for the sports world that private equity is here to stay. The team’s historic rival, the Boston Celtics, also sold to private equity players for $6 billion a year prior. But where did Joshua Kushner’s (brother of Jared’s) Thrive Capital get its seed funding to make such a purchase? Of the first billion it raised, $300 million came from a CalPERS investment, that is, from California’s state pension fund. To put the matter truthfully but a little too plainly, the workers now own a stake in the Lakers, even though none of them can afford to attend a game at the new Crypto.com Arena.
The Pension Fight Club documentary offers valuable evidence that there’s a long way to go in the push-and-pull between reform and deregulation in the field of workers’ capital. My sense is that if the movement to unearth pension funds’ investments remains limited to union activism and siloed lawyers alone, it may not be enough. Any taxpaying resident has good reason to care about how pensions are invested. The first reason is that shoring up these policies will lighten the tax load on local governments which are losing money; the second is the need to quell the idea that pensions are “unaffordable” due to what retirees are being paid.
Pensions are a functional structure in need of serious repair, and the crisis can hardly be blamed on meager cost-of-living adjustments or sweeteners offered to working-class retirees. While the media latches onto stories of superintendents and administrators earning six-figure pensions to characterize the problem, the majority of retirees with pensions are bringing in under $40,000. This is a crisis of short-term governance, financial capture, and the unaccountability of this industry.