By Heather Gillers | Photography and videos by Ricky-Thomas Serikawa for WSJ
A Michigan pension fund wanted to grow the second-largest coffee farm in Hawaii. What happened there demonstrates the perils of investing public workers' savings in private markets.
The $16 billion Lansing-based retirement fund ended up abandoning the coffee farm last spring after nine years and $86 million in losses. A few months later, the pension said it had lost $53 million on another ambitious private market bet: an investment with a one-year-old Swiss firm in renewable energy technology.
The ill-fated ventures are examples of an increasingly popular strategy: trying to keep costs down by investing in individual projects solo rather than pooling money with other big investors to invest in an array of projects selected by a manager. Around a third of the $12 trillion in global private-equity capital is now invested outside traditional commingled funds, up from 10% to 15% ten years ago, according to an estimate by Bain & Co.
The coffee and renewable energy losses amount to around 1% of total holdings at the Municipal Employees' Retirement System of Michigan, where a ten-person investment staff manages the savings of firefighters, nurses and other public workers under the supervision of a volunteer board. MERS' overall investment returns of 7.1% for the decade ended June 30 are in line with comparable public pensions, thanks largely to its substantial stock portfolio.
MERS said in an email that its private-markets portfolio has gained $2.5 billion since 2012. "Looking at losses in just two investments does not create an accurate picture of our long-term track record," pension officials said.
U.S. state and local pension funds invested some $1.3 trillion in private equity and other private assets as of the 2024 fiscal year, according to Boston College data, up from $200 billion in 2005. Those illiquid holdings make up an average 20% of smaller funds like MERS.
The origins of the coffee and renewable fuels projects date to 2013, when low bond rates were making it tough to meet the fund's then-8% return target. In its annual statement, the fund resolved to move money "very quickly," shifting about 12% of holdings into real assets such as agriculture and utilities.
For advice on real assets, MERS in 2015 hired Berry Polmann and Gaia Arnaboldi, former employees of one of the pension's private-equity managers. Their Zurich-based firm, Verdantf, was barely a year old when MERS put it in charge of managing $150 million in March 2016. In an acknowledgment of the risk the Michigan pension was taking, Verdantf promised MERS 10% of revenue collected from any other clients they could attract for the next 12 years. (A lawyer for the company said it never found any.)
The coffee farm, known as Kona Hills, got started in 2016 also. MERS committed $50 million to a property in Kona on the Western portion of Hawaii's Big Island, famous for gourmet coffee. The area's rugged terrain means coffee has to be picked by hand, and the typical farm there is less than 5 acres. Kona Hills aimed to plant about 1,000 acres, appraisal documents show.
An Atlanta-based private-equity firm, Domain Capital Group, agreed to manage the investment and took a 0.5% ownership share in a holding company for the project. The idea for the coffee farm came from MERS, a Domain spokesman said. There were no other investors. More than 99% of the money at stake belonged to Michigan workers and retirees.
Risk is more spread out in a traditional commingled private-markets fund, where a management firm pools cash from pensions, universities and other big investors and invests it in several ventures. MERS saved money on fees by investing more directly in real assets projects, investment chief Jeb Burns said in a 2021 interview with the trade publication Chief Investment Officer.
"People balk at the idea of doing direct investments, but if you have robust due diligence and a solid team, it's absolutely manageable and it has been a significant creator of value for us," he said.
By 2023, though, MERS was losing confidence in both the coffee farm and renewable fuels investments. The pension fund cut ties with Verdantf and Domain, transferring the assets they were overseeing to New York-based Ospraie Management. The new manager quickly turned up a host of longstanding problems.
In September, MERS sued Verdantf, Polmann and Arnaboldi. The suit said that after Ospraie took over, pension officials learned Verdantf had concealed risks and setbacks on the renewable fuels project and used MERS' money to salvage its founders' personal investments.
A Michigan lawyer representing Verdantf and Polmann -- now the firm's only employee -- said the allegations were untrue. The attorney, David Fink, disputed the loss on the renewable fuels project. He said MERS invested another $136 million with Verdantf on other projects, including a Peruvian avocado, blueberry and asparagus farm, and earned about 10% a year -- a total of $55 million in cash and $108 million in paper gains.
At the coffee farm, Ospraie found more problems. State and local inspectors had cited the farm for drainage issues, illegal employee housing, unauthorized septic tanks and other violations, at one point ordering a temporary halt to all soil preparation work on the property, government records show. The coffee farm's lender said Ospraie informed it in summer 2023 that the farm was running out of money.
The lender, Lakeland, Fla.-based AgAmerica, started foreclosure proceedings on the farm in June and is suing MERS and Domain for fraud for not disclosing the violations when applying for a loan in 2022. Both say the allegations are false.
A new team installed by Ospraie is running the coffee farm and is working to resolve the drainage problems and other issues. The illegal housing has been shut down. The new chief executive, an experienced coffee farmer, has limited the crop to 400 acres.
Write to Heather Gillers at heather.gillers@wsj.com
(END) Dow Jones Newswires
February 02, 2026 11:00 ET (16:00 GMT)
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