The Political Economy Of Public Pension Funds And Investment Privatization

Thesis (Ph.D.)--University of Washington, 2022Over the past decade, alternative assets such as private equity have been growing rapidly, twice as fast as the growth in public markets. Private equity’s growth has significant consequences for our economy and our ability to hold corporate power accountable. Through a combination of high levels of debt and other people’s institutional capital, private equity is able to acquire and operate a growing percentage of our economy, with very little skin in the game – all of which can raise concerns about the rise of business power and the societal structures in place to contest its growth. One avenue in which private equity’s business power could be challenged is through labor’s retirement capital. Depending on the specific constellation of constituents represented on a pension fund’s investment board and the power imbalance associated with that structure, concerns about headline, political, and reputational risks can expand the set of conventional market factors that challenge private equity investment allocation – or further investment privatization – and hold the industry accountable. This dissertation presents an analysis that speaks to private equity’s growing power and explores ways in which that power can be contested. The first paper showcases how private equity’s own business model, that relies on debt and opacity, facilitates the strengthening of its extractive business power. Empirical examples within the energy sector trace how these mechanisms operate through three levels of private equity’s extraction – through the extraction of natural resources, the extraction of labor’s retirement capital, and the extraction of a company’s value through rent-seeking behaviors. The latter two papers focus on the role of public pension funds as not only private equity’s largest investors, but also as key arenas for contestation. The second paper explores how the power dynamics and preferences within the public pension fund investment board, between plan participant and financial elite trustees, impacts the capital growth of private equity. I adopt a mixed-methods approach that uses compositional covariates to model the effects of board composition and pension fund sector on the probability of investment privatization as well as the portfolio share invested in alternative assets across 82 U.S. state-level public pension funds from 2001 to 2017. The results suggest that increasing participant trustee representation, particularly on those investment boards associated with more social movement unions (public-sector and teachers’ investment boards) can curtail investment privatization, whereas increasing elite trustee representation on the same investment boards, can spur investment privatization. This effect is clearest when investment boards are contending whether to privatize investment, rather than how much they will allocate to alternative assets. The third paper takes a more structural approach and explores how the power dynamics within the state – both through alliances between labor unions and gubernatorial partisanship as well as broader social mobilizations – impact private equity’s capital allocation from public pension funds. Using tobit models of over 80 state-level public pension funds, again between 2001 and 2017, the findings suggests that after the Occupy Wall Street mobilization, there was a partisan difference between pension fund investment privatization, compared to before Occupy. The findings suggest that pension funds in states with Democratic governors and high union strength tended to reduce investment privatization. Whereas pension funds in states with Republican governors and high union strength were associated with increasing investment privatization of public funds