When big investment firms want to tap public pension funds for money, they often put in a call to Alfred J.R. Villalobos.
From a modest office near Lake Tahoe’s casinos, Villalobos has spent years helping Wall Street players like Apollo Management gain access to the vast wealth held by the California Public Employees’ Retirement System and other funds.
By his own estimate, Villalobos netted his clients at least $16 billion in capital through 2005. His two firms have earned about $53 million in fees from investment funds that did business with CalPERS over the last seven years, records show, a sum that impresses even hardened veterans of state politics.
“I’m blown away by the amount of money he was paid,” said former Assembly Speaker Willie Brown Jr., a former CalPERS board member. “Fifty million in seven years is a lot of money.”
What exactly does Villalobos do for his paycheck? That question is part of an internal investigation CalPERS announced Oct. 14 and comes amid a broader investigation by state and federal authorities into the activities of intermediaries such as Villalobos in winning pension fund business.
With $200 billion in assets, CalPERS is the nation’s largest public pension fund, responsible for ensuring steady retirement checks for 1.6 million state and local government workers, retirees and their families.
Aiming to bolster investment returns, CalPERS and other public pension funds have gone beyond plain-vanilla stocks and bonds in recent years to invest in private equity firms that put money into real estate, leveraged buyouts of companies, commodities and other so-called alternative investments.
Private equity firms compete for this money, which is why outfits including Apollo Management, Ares Capital Corp., Aurora Capital Group and others hire so-called placement agents such as Villalobos.
Using knowledge gained from his years as a state political appointee and CalPERS board member, Villalobos helps clients prepare their sales pitches and then lobbies pension investment staffers and board members to help close the deals.
“It obviously helped him that he knew the players,” said J.J. Jelincic, a career CalPERS investment officer.
“As far as I can tell he has not done anything illegal. . . . He probably just used his influence with the board and senior management to help his client.”
This year Villalobos burnished his golden connections by hiring former CalPERS Chief Executive Fred Buenrostro as a registered representative, a job that includes making client presentations to CalPERS officials.
“We have been friends for almost two decades,” Buenrostro said of Villalobos. He declined to comment further.
CalPERS says it has not ranked placement agents by their volume of business, so it’s not known how Villalobos stacks up against his rivals. But CalPERS board members were shocked to learn the size of the fees Villalobos raked in, board President Rob Feckner said Monday.
Feckner added that it was unclear why big firms such as Apollo needed placement agents, given their experience at dealing with pension funds.
Intermediaries like Villalobos can play a useful role in helping smaller private equity funds get a foot in the door at big pension funds like CalPERS, said Santa Monica pension consultant Michael Rosen. But Rosen also worries that the fees earned by Villalobos make it appear as if CalPERS makes investment decisions based on political connections.
“If that’s what it takes, it’s not right,” said Rosen, a principal of Angeles Investment Advisors.
The 65-year-old Villalobos, who declined requests for interviews, has had a long career straddling business and politics.
After graduating from Whittier College in 1965, Villalobos went to work for the state and became active in Republican circles. By 1968 he had become president of the National Economic Development Assn., which lent government money mainly to Latino businesspeople as part of a Nixon administration effort to draw Latinos to the Republican Party.
In 1973, Villalobos established Arvco Capital Research and set up shop as a business consultant, helping minority-owned businesses win government contracts and serving on the board of several banks that focus on Latino customers.
“He was part of a GOP Hispanic group based out of Los Angeles trying to get in the system and be part of the political process,” said Jeff Weir, an aide to former U.S. Sen. John Seymour of Orange County. “And since there weren’t many Hispanics in the GOP at that time, they were a valuable conduit” to their community.
In 1993, newly elected Los Angeles Mayor Richard J. Riordan, a Republican, tapped Villalobos as his deputy mayor for economic development. Villalobos resigned five months later after a series of damaging disclosures in The Times.
The paper reported that Villalobos had declared personal bankruptcy in 1982, writing off $350,000 in debts instead of trying to work out a court-sanctioned repayment plan.
Seven years later, Villalobos bounced $30,000 in checks to pay a weekend’s worth of gambling debts in Lake Tahoe, which he refused to pay until the casino sued him.
After leaving City Hall, Villalobos shifted his focus to Sacramento, where, a year earlier, Republican Gov. Pete Wilson had appointed him to the state Personnel Board. That panel, in turn, named Villalobos as its representative to the 13-member CalPERS board, where he served from 1993 to 1995.
Villalobos began representing private equity funds at least as far back as 1994, company statements indicate, when he was still on the CalPERS board. In a report prepared for a 2007 conference in India, Arvco said it had raised $12 billion in capital for clients between 1994 and 2004 and about $4 billion in capital for its clients in 2005.
The report said Arvco had served as a placement agent for private equity outfits seeking money from the California State Teachers’ Retirement System, the New York State Common Retirement Fund, the University of California Retirement System and public pension funds in Ohio, Texas, Washington state, Oregon and New York City, among others.
His first deal as an intermediary involving CalPERS came in 1997, when he lobbied for board approval of a $100-million investment in a fund run by Texas-based Hicks, Muse, Tate & Furst. The fund focused on buying up troubled companies and making them profitable. In landing the investment, Villalobos overcame the objections of CalPERS staff and advisors who concluded that Hicks Muse was overpaying for firms it was buying.
He scored another coup in 2000, getting CalPERS to invest $125 million with the CIM California Urban Real Estate Fund. The CalPERS investment staff wanted to put in less than half that amount.
“The staff was opposed, but the board decided to do it,” said CalPERS spokeswoman Pat Macht, who noted that the CIM investment later turned out to be profitable, posting a five-year rate of return of 22.1% as of March 31.
In 2005, Villalobos hired two former Los Angeles-area state senators, Democrat Richard Polanco and Republican William Campbell, to help him in getting CalPERS to invest $100 million in a private equity fund run by Apollo Management, the firm headed by legendary New York financier Leon Black.
CalPERS has invested about $4 billion with Black’s firm going back to 1995. The $100 million it invested in 2005 went to Apollo Investment Fund VI, which financed corporate takeovers (including the leveraged buyout of casino owner Harrah’s Entertainment Inc.) and invested in corporate bonds.
For its role in securing the deal, Villalobos’ firm earned $10 million in fees, plus $300,000 in retainers and expenses, including first-class air travel and “chauffeured town-cars” for Villalobos, Polanco and Campbell, according to a copy of the contract released by CalPERS.
That same year, Villalobos’ daughter, Arvco lawyer Carrissa Villalobos, contributed $5,600 to the CalPERS reelection campaign of Charles Valdes, who has served on the CalPERS board since 1984 and has headed its investment committee several times. At least five other Villalobos associates or entities gave an additional $28,000, state records show.
The state Fair Political Practices Commission says it is investigating the contributions by Carrissa Villalobos and others after an audit revealed that they had exceeded the $3,300-per-person limit on donations.
CalPERS’ investments now are under a spotlight because of deep losses tied to the recession and last year’s crash on Wall Street. The investment portfolio is down about 20% from June 2007, when it stood at $248 billion.
Most of those losses, however, came from stocks and not private equity investments. The pension fund’s stock portfolio lost 41% of its value in the 12 months ended March 31, compared with a 19% loss for the private equity investments, according to Wilshire Consulting of Los Angeles.
CalPERS began looking into the role of placement agents in May, after investigations by New York Atty. Gen. Andrew Cuomo and the U.S. Securities and Exchange Commission into possible bribery and kickbacks involving placement agents and public pension funds in New York.
The New York investigation has resulted in fraud charges being filed against six people and four pleading guilty. Last week the chief investment officer of the New Mexico pension fund resigned as part of a widening inquiry. California Atty. Gen. Jerry Brown is also looking into placement-agent activities in California.
In Los Angeles, two members of the city Fire and Police Pensions board resigned in May after getting letters of inquiry from the SEC that asked them whether they had dealings with three placement firms being scrutinized in the New York probe.
Amid the heightened scrutiny, CalPERS adopted a policy ordering investment funds to disclose their relationships with intermediaries and the fees paid to them. That led to the disclosure of the $53 million in fees paid to Villalobos -- and prompted CalPERS Chief Executive Anne Stausboll (appointed last December) to order the investigation, which is being conducted by Washington securities attorney Phillip Khinda.
Robert Fellmeth, executive director of the Center for Public Interest Law at the University of San Diego, believes Khinda’s inquiry should focus on asking the private equity firms one question with regard to Villalobos.
That question, Fellmeth said, is simple: “Why are you paying $53 million to this guy?”