Facebook Takes Down Your Pension
Are you part of a public pension? If so you might want to read this. It seems retail investors aren't the only ones who've lost their shirts thanks to Facebook (Nasdaq:FB). It turns out that government pension funds across the country have taken it on the chin as a result of the IPO debacle. I'll try to sort through the wreckage to better understand just how badly pensions have fared.
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CEO and founder Mark Zuckerberg announced September 5 that he won't be selling any stock for at least 12 months. The announcement was received warmly by investors sending its stock up almost 5% by the close of trading. You know things have gotten awfully difficult when the CEO has to pledge his allegiance to the company and its stock. Pension offices coast-to-coast are breathing a big sigh of relief. The move reduces the number of shares available for sale in November by 33% down to 800 million. It's still a huge number but any news at this point has to be considered positive. What this means long term is still unknown, but for now it appears the move puts a floor under its stock price.
Before you start feeling sorry for yourself, let me remind you that the 100 biggest public-employee retirement systems in the United States earned 5.6% in the first quarter, the highest return on investments since the census bureau started keeping track of the figure in 1974. The pension funds don't like to lose; hence why they're suing Facebook. The California State Teachers' Retirement System bought 500,000 shares in the IPO for $19 million. It sold those shares in the first day of trading for a profit of $250,000. It since has purchased 1.2 million shares at an average of $32 a share for a $17 million paper loss. Hypothetically, if the pension fund had simply bought the First Trust U.S. IPO Index (ARCA:FPX), it would currently be sitting on a $3.7 million unrealized profit instead of a $16.75 million unrealized loss. Amazingly, it could have escaped with a small profit but chose instead to tempt fate a second time and now it's stuck being a "long-term investor."
CalPERS, the biggest state pension fund in America, hasn't done much better with its investment in Facebook. It owned 1.3 million shares as of the end of August with half purchased prior to May 23. I'd guess its paper losses are in the same ballpark. The California pension fund announced in early August that it is reviewing its venture investments and while the outcome is unknown, it's safe to assume that Facebook has soured on its desire to fund tech startups; not so much because of the risk in the startup itself, but rather the realization that the IPO exit strategy isn't a sure thing. In North Carolina, current and retired state employees are questioning the wisdom of the investment. Republican Steve Royal, a certified public accountant, and running for North Carolina Treasurer, wonders why the state pension fund made such an inappropriate investment. Frankly, given the performance of most IPOs in the first 18 months, you have to wonder why any pension fund is allowed to invest in them.
The Bottom Line
My opening paragraph was somewhat tongue-in-cheek. The Facebook investment for any state pension fund would be less than 1% of the overall assets, so in the big picture it's not a huge deal. However, given the hole dug in late 2008 and early 2009, it's important for pension funds to remember that it's less than four years removed from one of the biggest stock market declines in American history. Playing fast and loose with pensioners' money isn't a winning hand.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.