Take on the News: The Pension Fund Land Bust

Its a story that hasn't gotten much attention but should.  

LandSource Development Communities, a California real estate partnership, filed for Chapter 11 bankruptcy protection this weekend.    The company was a real estate venture involving homebuilder Lennar (NYSE: LEN), a unit of private equity firm Cerberus, and MW Housing Partners.

The problem is that one of the major investors in LandSource is CalPers, the giant California pension fund that handles the investments of around 1.5 million state workers.   In a sign of terrible timing, CalPers invested nearly $1 billion dollars in the venture in February of last year.   The real estate bubble began to burst just weeks afterward.   According to the Wall Street Journal's Matt Corkery, CalPers is likely to lose most of that investment.   Of course, CalPers itself really doesn't have money.   CalPers invests the money of the state employees and retirees.

No one is suggesting this will be a serious hit to CalPers.  The fund runs $250 billion dollars, so this investment represents less than 1/2 of 1% of its capital.  Its the poor foresight and timing of the investment that raises eyebrows.  At the same time CalPers was no doubt negotiating its investment in the LandSource deal, hedge funds such as Paulson & Company were already not only avoiding real esate in February of 2007, but actively positioning itself to profit from real estates decline.

To be fair to CalPers, there was much misguided optimism from the investment.  Witness the comments from the head of the the firm that invested in LandSource:

"We are excited to be investing in such prime property in Los Angeles, a market that we have favored for its long-term growth prospects," said Victor B. MacFarlane, founder and managing principal of MacFarlane Partners. "This is a once-in-a-lifetime opportunity (italics mine) that few pension managers and investors have the resources and the capabilities to participate in thanks in large part to the flexibility and vision of our long time partner, CalPERS."

From "once in a lifetime" to Chapter 11 in less than two years.  While that type of rapid destruction of wealth is fairly common in get rich quick schemes profiled in pictureless ads in the back of magazine, its an amazing fall from grace for some of the most highly regarded investors in the country.

Brian