Today Oregon PERS approved a $400 million investment in Stonepeak, a firm that invests in “infrastructure projects.”
In his presentation Stonepeak’s managing director Michael Dorrell noted their strategy is to invest in “essential infrastructure assets with an economic monopoly, much like an airport.” This includes water, power plants, transportation and telecom with a focus “outside the auction process.” They expect an annual return of 12 percent over 30 years.
One of their major projects he discussed is the largest desalination operation in the western hemisphere, in Southern California. The key development partner is Poseidon Resources, “former GE guys.” Dorrell noted they obtained the exclusive rights to such desalination projects. They brought these rights over from their former employer Blackstone, who is entitled to 50 percent of the carried interest from this project. The expected return is 14 percent over 30 years and the City of San Diego could not do much about this high rate since Stonepeak has rights to the “only viable site near San Diego.”
In the old days government entities would issue municipal bonds for such improvements in order to make sure the public interest is served with respect to keeping costs down. One might question why Oregon PERS is investing in such projects via private equity firms rather than directly funding them via a firm specializing in this area working with the municipality?
This also highlights why it is so important for Oregon PERS to fully disclose carried interest fees and partnership audit reports to the public. Key questions regarding Blackstone’s participation in 50 percent of the carried interest from the desalination project were simply not asked. They include noting whether Blackstone has other businesses independent of Stonepeak with a stake in the project, etc.
Put another way, more disclosure of private equity and hedge fund fees is important, not only with respect to their own funds yet also in terms of how much these funds have allocated fees to outside supposedly independent firms like Blackstone, especially if they come in the form of stock options. At a minimum, Stonepeak should update its SEC ADV filing noting that Blackstone has a material participation in its largest project.
Remarkably, one of Stonepeak’s principal equity owners, per SEC filings, is TIAA-CREF. Given that TIAA-CREF is tax exempt, along with Oregon PERS and most of the other limited partners, its not hard to see why tax rates are going up for the rest of us. The overall corporate tax base is simply vanishing behind tax exempt status.