CalPERS Faces Significant Losses Due to MicroStrategy Investment

The California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the U.S., is experiencing considerable losses on its investment in MicroStrategy (MSTR).

Key Takeaways

CalPERS acquired 448,157 shares of MicroStrategy for over $144 million but has seen its investment drop to roughly $80 million.
The decline correlates closely with broader market trends, particularly in Bitcoin prices.
MicroStrategy faces the added risk of being excluded from major equity indices, which could lead to large sell-offs from passive funds.
JPMorgan warns that exclusion from the MSCI USA Index could trigger significant investor outflows of up to $8.8 billion.

CalPERS faces heavy losses

CalPERS recently reported selling off part of its shares in MicroStrategy, leading to a significant decrease in investment value. This situation stems mainly from the volatility in Bitcoin and subsequent sell-off in tech stocks. The potential exclusion of MicroStrategy from key equity benchmarks poses an additional risk.

Heavy Losses for CalPERS Output

In the latest filings with the SEC, it has come to light that CalPERS invested over $144 million in MicroStrategy, acquiring 448,157 shares during the third quarter. Unfortunately, the stock has faced a dramatic sell-off, plummeting its value to around $80 million within a few months.

Despite this steep loss, it is not expected to severely impact CalPERS. The pension fund manages more than $550 billion in assets for over 2 million public workers and retirees, positioning the MicroStrategy investment as a minor, albeit volatile, aspect of its larger portfolio. The 45% drop in MicroStrategy’s stock price this quarter is largely attributed to a downturn in Bitcoin, coupled with broader market apprehension that affected tech and cryptocurrency assets.

Looking forward, MicroStrategy’s primary concern may extend beyond mere price fluctuations. The company is at risk of being excluded from major equity indices like the MSCI USA Index and the Nasdaq 100, which could significantly dampen investor demand.

JPMorgan Highlights Index Exclusion Risks

JPMorgan has identified critical risks pertaining to MicroStrategy's heavy dependency on Bitcoin [BTC]. This reliance reportedly contravenes index criteria intended to differentiate operational businesses from investment vehicles. The implications are considerable, given that nearly $9 billion of MSTR stock is currently held by passive funds tracking these benchmarks. Losing index status could lead to drastic financial outflows.

JPMorgan warns that a removal from the MSCI USA Index could instigate as much as $2.8 billion in sell-offs, and if similar actions occur across other indices, the outflows could escalate to approximately $8.8 billion. The MSCI's decision is anticipated by January 15; should MSTR be excluded, it would compel passive funds to liquidate their shares.

MicroStrategy’s strategy has involved issuing stocks to purchase Bitcoin, thereby leveraging market rallies to gather more capital. This tactic has resulted in the company's market valuation exceeding the actual value of its Bitcoin holdings, heightening its market risk and exposure.

Additional Considerations

MSCI currently characterizes MicroStrategy as a passive fund, a designation that CEO Michael Saylor vehemently disputes. He emphasizes the company's $500 million software division and its active fundraising efforts. Investment banking firm TD Cowen also estimates that exclusion from indices could lead to a selling cascade of up to $8 billion.

Despite assurances from MicroStrategy that its assets can cover its debts—with a 5.9 times ratio, even if Bitcoin falls to $74,000—skeptical market sentiments linger due to a declining multiple-to-net-asset-value (mNAV).

Conclusion

In summary, CalPERS' situation with MicroStrategy highlights the broader challenges faced by institutional investors in the highly volatile tech and cryptocurrency spaces. It's a cautionary tale about the risks associated with investments that are sensitive to market fluctuations and index classifications.