CalPERS to disclose details about intermediaries
California’s giant public pension fund, racked by criticism for the way it has managed a $205-billion portfolio, is preparing to disclose new details about the financial middlemen who play a little-understood and lucrative role in pension investing.
At issue are unregulated placement agents paid millions of dollars by private investment funds to act as marketing pitchmen to help get business from the California Public Employees’ Retirement System, known as CalPERS.
After a pension-fund scandal in New York last year highlighted the role of placement agents in bribery and corruption charges there, the CalPERS board ordered a review of the use of placement agents by roughly 400 private equity and real estate investment funds in which the California agency has invested.
As soon as this week, the agency is expected to make public hundreds of documents collected from the private funds that were asked to report the names of agents they have employed, the investments those agents promoted and the fees those agents were paid.
This week’s expected disclosure follows revelations last fall, when the agency stunned its own board members by releasing documents showing that a Nevada businessmen, Alfred J.R. Villalobos, received more than $70 million in middleman fees for helping private equity and real estate fund managers close deals with CalPERS.
The big numbers “quite frankly, shocked people,” said J.J. Jelincic, a veteran of CalPERS’ investment staff and a newly elected member of the fund’s 13-member board.
Since then, the CalPERS board has endorsed proposed legislation that would make placement agents register as government lobbyists. The proposal would also prohibit paying such agents commissions instead of flat fees, and those payments would have to be made public.
The board has also added a new policy forbidding its members from dealing directly with agents.
CalPERS’ first-ever mass disclosure on the subject is to come in response to requests for documents from The Times and other publications under the California Public Records Act. It is unknown exactly which records will be disclosed.
As a whole, the documents are expected to provide clues as to how big and far-reaching the use of placement agents is, what kinds of CalPERS projects they have been involved in and how much they have been paid.
Placement agents, who offer marketing advice and services, are pervasive and are involved in investment decisions at both public and private pension funds as well as other institutional investors, experts say. Agents include individual entrepreneurs such as Villalobos as well as boutique consulting firms and major investment banks such as Credit Suisse and Merrill Lynch, a unit of Bank of America Corp.
In addition to Villalobos, agents that have worked with CalPERS and other California pension funds include Wetherly Capital Group of Los Angeles and Gold Bridge Capital of San Francisco.
Daniel Weinstein, the top executive at Wetherly, and his counterpart at Gold Bridge, Darius Anderson, are politically connected Democratic Party activists and fundraisers with close ties to many labor union officials on the CalPERS board. Weinstein and Anderson both formerly worked for Yucaipa Cos.
Yucaipa is controlled by billionaire Ron Burkle, a Southern California supermarket magnate-turned-private equity investor, and manages about $500 million in CalPERS investments.
The coming revelation of just how much placement agents are being paid for deals with CalPERS could be another eye-opener, Jelincic predicted. It probably “will show that we pay outside investment managers too much money” if the managers can afford to pay high fees to agents, he said.
Without placement agents, investment managers should be able to reduce the fees they charge CalPERS, said Robert Fellmeth, executive director of the Center for Public Interest Law at the University of San Diego. “Are you acting prudently if you can find hundreds of millions of dollars going from your fund managers to third parties?” he said.
The sheer size of fees paid to placement agent fees also raises a bigger question: Are expensive placement agents really needed?
“CalPERS is the largest pension fund in the world. They don’t need someone to walk an investment manager through the door,” said Edward Siedle of Benchmark Financial Services, an expert on pension fund malfeasance and a former attorney with the U.S. Securities and Exchange Commission. “A placement agent is a door opener and a pitchman, which means he’s an unnecessary intermediary.”
CalPERS’ large investment staff and hired consultants have more than enough expertise to find solid investments without the help of placement agents, added David Elder, a former assemblyman from Long Beach who chaired the Assembly’s pension committee for a decade. “This is the biggest pot of money around; they have to fend off proposals on a daily basis.”
But some say these salesmen provide a useful service in helping smaller pension funds get in touch with new investment managers that cannot afford or don’t want to be burdened by maintaining their own marketing departments.
“I want a placement agent. That’s how I’m going to find out about new and emerging funds,” said Winston Hickox, a former CalPERS investment manager who is now on the board of the Sacramento County pension system.
The CalPERS board is correct to require the disclosure of relationships and payments, said Steven Standbridge, a partner of Capstone Partners, a Dallas placement agent. But, he said, a few bad agents who exploit their ties to politicians “have created reputational problems for everyone else in the business.”
