CalPERS, private equity firm alter dealings after middleman scandal
Stung by a scandal in which financial middlemen were paid millions of dollars to arrange business deals with it, California’s giant public pension fund announced sweeping changes in its dealings with a New York private equity firm.
The California Public Employees’ Retirement System, known as CalPERS, said Apollo Global Management has agreed to cut the fees it charges and to stop using middlemen who broker deals.
CalPERS and New York-based Apollo jointly announced the new agreement Monday, six months after Apollo was embarrassed by disclosures that it paid more than $40 million to a former CalPERS board member, Alfred J.R. Villalobos, for acting as its so-called placement agent in a series of CalPERS investments.
The huge fee disclosures being paid by CalPERS’ business partners came to light in October 2009 after a New York scandal raised questions about the role of placement agents in pension fund deals. A series of CalPERS disclosures then revealed that investment managers have paid a total of $125 million to placement agents.
Since then, CalPERS’ board has endorsed legislation to force placement agents to register as lobbyists and to prohibit them from collecting commissions based on the size of the investment deals they land.
As part of the new agreement, Apollo said it would no longer use Villalobos or any other placement agent in any deals and would certify quarterly that it was not directly or indirectly using them.
For its part, CalPERS said it would complete a $5-billion investment it previously committed to make with Apollo, the partner managing the largest piece of its “alternative” investments, which include private equity and hedge funds as well as real estate and commodities.
“This is a true win for CalPERS,” said Philip S. Khinda, the Washington securities attorney hired by the pension fund to investigate placement agent matters. “It’s a nice way for Apollo to make things right and set the tone going forward.”
Last fall, CalPERS made public that it was reviewing its 15-year financial partnership with Apollo in the wake of steep losses on its Apollo-related investments generated by the latest recession. Those partnerships have since gone back into the black, Apollo said.
The deal is expected to save CalPERS about $125 million over the next five years. That windfall is “a game changer,” CalPERS board President Rob Feckner said. “It brings a large sum of money to the fund and it sends a signal on how other investment managers can align their interests with those of our members,” he said.
The savings would come from reduced fees to manage about $1.8 billion that CalPERS has invested with Apollo.
The so-called new strategic relationship between the $213-billion CalPERS and $53-billion Apollo is a good step toward satisfying CalPERS’ desires for lower investment costs, increased transparency and the elimination of the need for placement agents, said Leon Black, Apollo’s chief executive.
“We believe in proactively addressing these issues with our partner and affirming its priorities and objectives,” he said. “We have established a foundation to enhance and grow our long-term partnership.”
In addition to unveiling its agreement with Apollo, CalPERS took preliminary action Monday to reverse a policy toward investing in residential property partnerships that eliminate rent controls for tenants.
Two such real estate partnerships that have recently gone belly up turned out to be black eyes for CalPERS because they sought to push thousands of low- and middle-income tenants out of apartments in New York and East Palo Alto, Calif.
CalPERS lost $500 million on the deal to acquire Stuyvesant Town and Peter Cooper Village apartments in New York in 2006. It lost $100 million on the failed Palo Alto acquisition in the same year.
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