In wake of FTX collapse, many questions, fewer answers about public plans’ private holdings and who is benefiting from them. Crypto exposure is ‘a canary in a coal mine.’

Robin Rayfield had three minutes to speak. That wasn’t much time for the 66-year-old Delta, Ohio, retired educator to raise his long list of concerns about the defined-benefit pension plan he relies on for his retirement income.

It was December 2022, about a month after the collapse of cryptocurrency exchange FTX, and the roughly $90 billion State Teachers Retirement System of Ohio, one of the largest U.S. public pension funds, was holding a board meeting at its offices in Columbus. The shockwaves running through the digital-asset ecosystem added a fresh worry for retirees like Rayfield, who had long been concerned that they weren’t getting enough details on the fees and performance of their pension fund’s outside investment managers. A private equity trade publication, Buyouts Insider, had reported in early December that the Ohio teachers’ pension plan had some FTX exposure within a private equity fund–whose holdings aren’t publicly available–and STRS hadn’t responded to questions about it, according to the publication.

“We still are waiting on information about alternative investments,” Rayfield told the pension fund’s board. “How much was invested, what are the fees and costs, and what is the value of that investment? Now we’re worried about crypto,” said Rayfield, who is also executive director of the Ohio Retirement for Teachers Association, which has about 18,000 members. “At this point, quit trying to beat the market,” he added. “Take what the market gives.” Some other retirees participating in the meeting echoed Rayfield’s remarks, raising questions about potential losses tied to FTX and advocating for index funds over crypto-related holdings.

The board didn’t respond to the retirees’ questions at the meeting. But in fact, STRS had nearly $9.5 million in exposure to FTX, including about $6.6 million within a private-equity fund called Thoma Bravo Growth Fund and the rest “spread across various funds,” STRS told MarketWatch. As for the pension fund’s total exposure to crypto-related holdings, STRS had to do some research to arrive at a figure. Throughout November and December, the retirement system worked with its outside money managers to tally its total exposure to tokens, blockchain technology and other holdings that would feel the pain if crypto imploded, arriving at a total of nearly $125 million, STRS said. Thoma Bravo, which was also a source of FTX exposure for the $240 billion New York State Common Retirement Fund, declined to comment.

Bitcoin, the most popular cryptocurrency, has plunged 67% from its all-time high in late 2021, and since the collapse of FTX, research groups, taxpayers, and retirees have been digging for details on how the crypto contagion may impact public pension funds–with spotty results. Although public pension funds’ crypto-related allocations are generally a small fraction of their total assets and derived in part from publicly traded holdings such as Riot Platforms (RIOT) and Marathon Digital Holdings (MARA), much of it comes through private-equity and venture-capital funds that reveal little to the public. Researchers have struggled to compile a comprehensive list of public plans with FTX exposure. And some public plans questioned about their FTX or broader crypto-related exposure have provided only carefully conscribed details about those holdings–or none at all, MarketWatch found in interviews with taxpayers, plan participants and pension officials and review of plan communications.

The fog around these holdings is fueling broader concerns, pension experts say. State and local pension funds work on behalf of the public, are responsible for paying steady retirement benefits to roughly 12 million former teachers, police officers, firefighters and other retirees, and rely on taxpayer-funded contributions when their returns fall short. That means they should be held to higher transparency standards, ranging from fee disclosure to listings of every private-equity fund they hold and their portfolio companies–but “that level of transparency does not exist in every state,” said Anthony Randazzo, executive director of Equable Institute, a nonprofit focused on public retirement systems. Despite their market heft, managing about $5.6 trillion in assets, public plans don’t always drive a hard bargain when negotiating investment terms with private funds, researchers say, instead signing on to non-disclosure agreements that keep fund fees and performance under wraps.

Some pension officials and investment managers say there’s a tradeoff between transparency and access to the top private funds. “Transparency is great,” said Mark Yusko, CEO of Morgan Creek Capital Management, which manages blockchain-focused funds that are held by some public retirement systems. Yusko’s funds have made investments directly in crypto and related assets, including one that blew up spectacularly. “But we all want to be on the best team,” he said. “There are definitely public pension plans that have zero chance of ever getting into certain funds because they can’t sign the non-disclosure stuff.”

The heightened scrutiny of public plans’ private holdings coincides with a Securities and Exchange Commission proposal that would require private funds to give their investors details on the full cost and performance of the funds. The SEC “has a critical role in improving the inefficient and dysfunctional way that investors currently negotiate investment terms in private funds, a process which often leaves them without the basic information necessary to evaluate their investments,” a group of more than two dozen consumer-advocacy, labor and research groups wrote to the SEC last month. “Such an antiquated process has unfairly allowed for the transfer of billions of dollars in wealth from public pensions” and other institutional investors to private fund advisers, the groups wrote.

Public pensions’ crypto-related holdings are also “a canary in a coal mine,” Randazzo said. “They’re an example of the kinds of bets public sector pension funds are taking to try and meet some fairly unrealistic investment return targets.” Between 2001 and 2022, virtually all public plans have fallen short of their return assumptions, according to the Center for Retirement Research at Boston College. Currently, the plans’ average return assumption is close to 7%. They maintain lofty return targets because “it costs less,” said Jean-Pierre Aubry, the center’s associate director of state and local research. “Pension fund contributions are based on their expected returns, regardless of how much risk is baked into that return.”

Pension funds’ public meetings leave some key questions unanswered

The well-heeled taxpayers of McLean, Va., had questions–about five single-spaced pages worth of questions–about the crypto-related holdings in two of their county’s public pension plans. Over the past few years, Fairfax County Police Officers Retirement System and Employees’ Retirement System officials had been talking on podcasts, industry panels and in the media about their pioneering move into blockchain and other crypto-related holdings–but since the collapse of FTX, they’d been talking a lot less. The retirement system posted a note on its website early this year explaining the thesis behind its blockchain investments and showing that the police officers’ fund had a 7.2% weighting in blockchain funds as of year-end 2022, while the Employees’ fund had a 4% weighting. But it didn’t list specific fund holdings, saying that state public-information law gives public pensions exemptions from disclosing details that could adversely impact the value of their investments.

McLean, known for its sprawling mansions and Potomac River views, has a more than century-old, politically well-connected citizens’ association. Through a connection on the county board of supervisors, the McLean Citizens Association was able to arrange a mid-January meeting with the two pension funds’ investment chiefs to talk about their crypto-related holdings. The virtual meeting, which the citizens’ group posted on its Facebook page, lasted two hours. Some of the group’s questions got little response.

‘We are under a number of different restrictions in terms of some of the things we can discuss,” the Fairfax Employees’ Retirement System investment chief Andrew Spellar said near the outset of the meeting. But the managers did divulge specific fund holdings that hadn’t been listed in the retirement system’s online blockchain post.

It wasn’t until a month later, in February, that the retirement system hosted a blockchain-focused public meeting that was advertised to members on its website. During that 90-minute meeting, the pension officials, who declined to comment for this article, emphasized that they had never invested in FTX, directly or indirectly, and had overall turned a profit on their blockchain-related holdings.

After all that talking, much remained unsaid. EJF Silvergate Ventures Fund, which Fairfax Police Officers Retirement System investment chief Katherine Molnar cited as a holding during the January meeting, is a joint investment vehicle of EJF Capital and Silvergate Capital Corp., which operates a crypto-friendly California bank and has been questioned by members of Congress about its potential role in the loss of FTX customer funds. In early February, Bloomberg and Reuters reported that U.S. Justice Department prosecutors were probing Silvergate’s dealings with FTX and Alameda Research. On March 1, Silvergate said in a regulatory filing that it would delay filing its annual report, saying that it is “currently analyzing certain regulatory and other inquiries and investigations that are pending with respect to the company” and evaluating its ability to continue as a going concern. Silvergate and EJF declined to comment.

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