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Buyout Firms’ Profit-Goosing Scheme Spurs Backlash From Clients

  • Borrowed money ‘muddies’ fund performance, customers worry
  • Dutch retirement pool is said to find strategy’s use excessive
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Photographer: Ken James/Bloomberg

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Pension funds are taking aim at private equity firms for exploiting a financial sleight of hand that can make even mediocre investments look brilliant.

Discontent has been simmering for a couple of years, but now the California Public Employees’ Retirement System and others are more forcefully pressing their case. The dispute centers on a common -- and legal -- practice: To make an investment, private equity funds are increasingly borrowing against clients’ commitments, then asking for the cash later.