Pension Plan Participation in Leveraged Buyout Funds

GAO discussed the role of pension funds in leveraged buyouts (LBO). GAO reviewed 4 plan sponsors and found that: (1) they invested $474 million in assets in 44 LBO; (2) they made their decisions after evaluating the LBO firms' reputations, experience, and track records; (3) generally, LBO fund investments are risky because their assets are committed for 10 or 12 years and cannot be traded on the open market and an economic downturn could result in insufficient assets to service acquisition-related debt; and (4) LBO fund investment returns usually occur after a sale, recapitalization, or public acquisition. GAO also found that: (1) all six LBO funds it reviewed were limited partnerships, with the LBO firms serving as general partners; (2) 4 of the 6 LBO funds limited their investments to friendly takeovers, while two had limits on the total amount that could be used for any acquisition; (3) 5 of the funds required limited partners to pay 1 to 2 percent of their investment as management fees to the general partner during the first 5 years; (4) although no study has been conducted on the effect of pension plan assets on LBO, 1 plan made $2 million on stock after a takeover, and another experienced significant bond losses; and (5) the Pension and Welfare Benefits Administration investigated an LBO fund for alleged violations of the Employees Retirement Income Security Act.