Pension Funds Unfriend Facebook

Last Friday the Los Angeles Times ran a nice article detailing the differing pension fund responses to the $50 billion drop in Facebook’s market value since its $38/share IPO.  

The first response: 

Three pension funds have joined a class-action lawsuit against Facebook and its underwriters. The suit, filed in U.S. District Court in Manhattan, N.Y., alleges that lead underwriters led by Morgan Stanley gave only some select investors a heads-up that Facebook’s revenue forecast had soured.”We expect Facebook and the people who benefited from that sale to pay up,” said George Hopkins, executive director of the Arkansas Teacher Retirement System, which has lost about $2.9 million on about 142,500 Facebook shares it has kept from the IPO.

I have not read the court filings, but how could you not expect a suit when the current market price is less than 50% of the offering price?  Aside from whatever direct damages may have resulted from misrepresentations by Facebook and its underwriters, the decline of the IPO over the last couple of years–filings and pricings of IPOs in 2012 are down from 2011, and 2011 was worse than 2010–will almost certainly accelerate because of Facebook.  Among other reasons, this matters for pensions because, unlike most retail investors, they have traditionally enjoyed first access to IPOs, and in many cases have taken advantage of a first-day pop in the market price.  The pop was short-lived for Facebook: a quick 18% jump in initial trading, then a drop down to $38.23 by the end of the day as demand faded.

But some pension investors are sticking with Facebook because they are taking a “long-term” view.  Again from the LA Times:

The California Public Employees’ Retirement System, the country’s largest public pension, refused to reveal how many shares it bought in the IPO. CalPERS had 557,140 Facebook shares on May 23 and more than doubled its stake to 1.3 million shares as of this week, according to a spokeswoman.

The California State Teachers’ Retirement System bought about 500,000 shares in the IPO — worth about $19 million — and sold them when the price briefly popped on the first day. CalSTRS made about $250,000 on the sale, a spokesman said.

CalSTRS has since loaded up on 1.2 million Facebook shares, a stake that has cost the pension fund about $17 million in paper losses, a spokesman said.

“As a patient, long-term investor with a 30-year investment horizon we believe that over time, the stock and the company should perform well,” CalSTRS spokesman Michael Sicilia said in an email.

Even if they are sticking with Facebook, CalPERS, CalSTRS, and other pension funds are certainly taking a close look at the functioning of the IPO market, and are likely encouraging regulators to do the same.

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