In 2015, Madison Realty Capital financed landlord Raphael Toledano’s purchase of a portfolio of 16 buildings in the East Village—buildings where, tenants say, Toledano endeavored to clear out of the rent-regulated tenants. Madison “doesn’t seem to take any consideration that there are people involved,” says Jim Markowich, one of two original tenants remaining in his East 5th Street building. “We never seem to be anything more than a calculation or disruption to their plan.”

Madison is one of several private equity firms, including Rockpoint Group and Brookfield Asset Management, that have been known for raising investment capital for bloated real estate deals toward the apparent end of moving out tenants and raising rents. (New York City advocates have coined a term for this practice: “predatory equity.”) When Madison bought a 16-story rental building in Midtown in 2015, its prospectus proposed “pursuing 51 tenant buyouts of rent stabilized units…and then renovating and reconfiguring each unit.”

To raise money for these deals, private equity firms take on investors as limited partners, promising cash returns. And among those investors are two of New York’s largest pension funds—the New York State Common Retirement Fund and Teachers Retirement System—which represent more than a million workers combined. Together they have put millions of dollars into these investment firms, which tenants argue profit off the displacement of residents.

"As a state if we are committed to investing in our future and retirement, keeping our housing stock affordable and not pushing out renters is critical,” says Jackie Del Valle, coordinator for Stabilizing NYC, a coalition of 16 affordable housing groups. “And speculation works against that goal."

As limited partners, pension funds don’t necessarily know how fund managers are spending state workers’ money. Thanks to a lack of reporting requirements, there’s no guaranteed method for determining if public pension funds have gone into, say, the Toledano deal specifically.

But Boston University Law Professor David Webber says pension funds can still use their status as major investors to exert leverage on private equity firms to change their practices. In 2018, nearly a third of the largest private equity investors in the world were public pension funds.

Private equity firms “have people who do nothing all day and all night but try to win public pension fund investments, so it's a very important relationship,” says Webber, author of The Rise of the Working Class Shareholder: Labor’s Last Best Weapon. “They're sources of a lot of capital, and if they exercise it, that gives public pension funds some real clout.”

That clout might be used to establish guidelines for pension investment managers to follow. New York City’s pension funds, for example, recently adopted a “Responsible Contractor Policy” demanding fair wages and benefits for workers on any real estate project they fund.

Now some rent-regulated tenants and advocates want the state pension funds to follow suit, potentially by pursuing investment policies that minimize displacement.

“It's unlikely that you will see pension funds moving away from private equity,” says Jim Baker of the watchdog Private Equity Stakeholder Project. “It is reasonable for them to say to private equity managers, ‘Look, we have expectations. We're concerned about the role you are playing in the housing market, and we have expectations on limits on rent increases and other tenant protections.’”

While the historic rent-law agreement in Albany has closed loopholes that have long greased the wheels of displacement, tenant advocates warn that it’s unlikely to put a stop to predatory equity. Cea Weaver, campaign coordinator for the Upstate Downstate Housing Alliance, notes that private equity companies are already turning to investing in unregulated housing, like upstate markets and buildings too small for city rent regulations to apply.

The New York State Teachers Retirement System (NYSTRS) has 430,000 members and is valued at nearly $120 billion. Its 2018 annual report shows investments—of an undisclosed amount—in two debt funds managed by Madison. In 2014, Pensions & Investments reported, the NYSTRS invested $50 million in a Madison debt fund that pension fund spokesperson John Cardillo said “specializes in distressed opportunistic debt.” (The firm declined to comment.)

A recent asset list for the New York State Common Retirement Fund (CRF)—the country’s third largest public pension fund, with an estimated value of $210 billion and more than a million members—shows investments of more than $55.2 million in Rockpoint Group, a firm with $13.5 billion in assets. The firm bought Riverton Houses in Harlem in 2005, through a controversial $225 million deal contingent on plans to convert half of the 1,230 units to market rate. (NYSTRS has reportedly invested in Rockpoint as well: $50 million in 2014.) Rockpoint declined to comment.

NYSTRS and CRF also have investments in funds managed by two massive private equity firms: New York-based Blackstone Group, the world’s largest private equity fund with $512 billion in managed assets, and Brookfield Asset Management, which manages more than $350 billion.

This year, Brookfield listed a 4,000-unit complex in Harlem, known as the Putnam Portfolio, for $1.5 billion. A listing this spring boasted that the onetime low-income complex has no rent-stabilized units, making it attractive despite “likely tenant-friendly changes” to the state rent laws.

In the case of Blackstone, Weaver says the adoption of tenant-friendly investment guidelines by a firm that large could have a ripple effect. “They are one of the biggest rent-stabilized landlords in the city,” she says. “They set the model that other firms follow.”

The New York State Teachers Retirement System did not respond to multiple requests for comment. Matthew Sweeney, a spokesman for New York State Comptroller Thomas DiNapoli, whose office manages the Common Retirement Fund, only emphasized the fund’s “lack of involvement in private equity investment decisions” as a limited partner.

There is precedent for public pension funds flexing their muscle on housing issues, however. In 2008, a coalition of grassroots housing advocates—including Tenants & Neighbors, the Legal Aid Society, and the Community Service Society—successfully called on then-New York City Comptroller Bill Thompson to enact an “opt-out” policy for future deals, allowing city pension funds to decline investments in private equity firms found to be flipping apartments.

The coalition members were able to trace city pension money to specific real estate deals that harmed tenants, strengthening their case. (The policy is still in place today, Comptroller Scott Stringer’s office tells Gothamist.)

Webber stresses that fund managers still must obey their fiduciary responsibility to earn money for their fund members. But, he says, there is a precedent for using fund investments to promote broader policy goals. And sometimes fiduciary and ethical responsibility align. The Toledano deal, for example, didn’t result in timely returns. He ultimately failed to make his mortgage payments to Madison, while being forced to make millions in damages to aggrieved tenants as recently as this month.

“It's not the job of the pensions to save the world,” says Webber. But so long as responsible investing doesn’t cost future pensioners, he says, “I think what these activists are talking about is an entirely plausible approach.”