Pennsylvania’s largest public pension fund is unwilling to trust the U.S. stock market too far. Plus, it needs to show results in school pension funding, which cost state and local taxpayers $5 billion this year. So the $57 billion Harrisburg-based fund is scouring the globe for profits, and sometimes investing in perilous markets.
Among the bets approved by Public School Employees’ Retirement System (PSERS) trustees last month is $300 million for SSG Capital Partners IV LP, the largest of five Cayman Islands-registered investment funds set up by SSG Capital Management, a Hong Kong-based firm started by three laid off Lehman Bros. Asia executives after that Wall Street investment bank blew up in the last financial crisis.
SSG has raised $4.5 billion — mostly in the last two years, much of it from U.S. public pension funds such as PSERS — by promising opportunities in Asia that its fans say are unavailable to stock and bond investors or bank lenders.
The newest and largest SSG fund, the one PSERS bought into, will split its money between Asian “distressed assets,” companies that can’t get bank loans, and Asian “special situations,” bargain-priced troubled firms, including those taken over by creditors who want to sell them for cash.
Concentrating on financially needy companies — primarily in India, but also in China and Southeast Asia — the fund targets performance returns of about 15% a year (a little better than the S&P 500 has returned since 2009), senior portfolio manager James F. Del Gaudio wrote to trustees and posted on the PSERS website a month before the August vote.
“SSG’s deep knowledge of the regional credit, distressed and private financing space” should help it find good deals, Del Gaudio added.
SSG will apply a “hands-on approach” to turning around troubled companies. The company says it has 173 staff working under 15 managing directors and other senior bargain hunters based mostly in China and Southeast Asia, plus “affiliate offices” in India’s financial and political capitals, Mumbai and New Delhi, and is licensed around the region. PSERS chief investment officer Jim Grossman visited SSG offices in Hong Kong in July.
SSG’s paid “placement agent” in helping it win PSERS’s approval is a New York City firm, Mercury Capital Advisors, whose fee for helping SSG get hired isn’t reported, either by PSERS or in SSG’s filing with the U.S. Securities and Exchange Commission. Mercury officials didn’t respond to inquiries. SSG’s founding partners — Hong Kong-based Wong Ching Him (Edwin Wong) and Andreas Vourloumis, and Singapore-based Shyam Maheshwari, — did not respond to requests for comment on that arrangement. SSG general counsel Richard Yee declined to comment.
The challenges of squeezing fat profits from struggling private Indian companies was driven home by a recent tragedy. One of the best-known firms that SSG (and other big investors) backed is Café Coffee Day, the “Starbucks of India,” with more than 1,000 stores. Its founder, V. G. Siddhartha, was found dead in a river near Mangalore in southwest India at the end of July. Siddhartha left a note, widely reported by Indian media, apologizing to “the people who have trusted me,” and citing pressure from state tax officials and “private equity” investors, to whom he had mortgaged his stake in the company.
Other issues have also kept SSG’s lawyers busy. Last year, Kyko Global Inc., a Canada-based finance company, sued SSG Capital Management and the founding partners, accusing them of abetting fraud by SSG’s former client, Madhavi Vuppalapati, who from 2000 to 2014 was chairwoman of India-based information technology firm Prithvi Information Solutions Inc. and ran its U.S. offices in Pittsburgh. SSG, which helped Vuppalati’s company raise funds, has called the lawsuit “without merit.”
Prithvi’s own clients included Amtrak and Carnegie Mellon University. The firm imported engineers from India to the U.S. using federal H-1B visas. Its business declined after the mid-2000s, and Vuppalapati returned to India, according to court records.
In 2017, a federal grand jury in Seattle indicted her, family members, and associates on fraud charges, accusing them of using phony bills to ship millions of dollars beyond the reach of creditors. Vuppalapati and her brother and co-owner, Satish Kumar Vuppalapati, failed to show up for court, and the government issued warrants for their arrests. SSG officials have said these claims against Vuppalapati are unrelated to its business.
As Prithvi’s business declined, Vuppalapati and her company misappropriated $35 million that they had raised from bonds sold by the SSG founders, according to Kyko’s lawsuit. Kyko, as collection agent for Prithvi’s creditors, traced the money through a series of accounts. In its lawsuit, Kyko accused SSG and its founders of helping Vuppalapati hide the money and accused SSG of unjust enrichment. SSG lawyers deny wrongdoing and have asked the Pittsburgh judge to drop the SSG defendants from the suit.
These allegations are not mentioned in PSERS’s published memo and consultant report recommending the SSG investment. Yet both the consultant and PSERS “were aware of these legal matters since at least 2018,” spokesman Steve Esack said. Indeed, PSERS produced a “confidential written report on the lawsuit’s allegations,” which “strongly asserts these matters will not have an impact on SSG’s ability to manage PSERS’s investments.” Esack said the board reviewed the report before approving SSG. PSERS declined to make that report public.
Officials at Kyko told me they are surprised that some U.S. public institutions are plunging into troubled private-company investments in India. “Prudence dictates that [investors] handling public funds should in no way risk these moneys with managers without impeccable credentials,” said Tejesh Srivastav, a Cornell-educated investment banker who is advising Kyko chief executive Kiran Kulkarni. Raising money for a “crooked company,” as he called Vuppalapati’s former firm, “is not a profile that inspires confidence.”
There are broader concerns. “India is in many ways more corrupt and harder to perform real due diligence in than China,” said Dan David, a veteran Asian stock researcher and critic, formerly based in Montgomery County, who heads Wolfpack Research in New York.
Without studying SSG’s investments closely, David questioned how effectively a U.S. pension fund can perform due diligence on India’s complex financial, enforcement, and regulatory conditions.