CalPERS sets open-door policy for pitches
So what does it take to get your foot in the door at California’s giant public pension fund with its $203 billion in stocks, bonds, real estate and commodities?
It has become a somewhat embarrassing question lately in Sacramento, where the California Public Employees’ Retirement System is struggling to be more open about how it does business at a time when investment performance is subpar.
For years, the nation’s largest public pension fund basked in the luster of impressive financial returns, a reputation for investor activism and leadership in corporate governance reform, all in the name of 1.6 million state and local government workers, retirees and their families.
But with a 20% drop in the value of CalPERS investments since a 2007 peak, a New York pension scandal with ties to California and revelations that well-connected investment intermediaries made millions on pension deals, the heat is on.
The secretive public agency, spurred into being more open, is revealing more about its inner workings and is quietly moving to make the fund less dependent on financial intermediaries. The agency last month disclosed that about 300 funds in which it invested paid intermediaries -- including former board members -- more than $125 million to help them hook up with CalPERS.
The figure raised questions about what these so-called placement agents do for their money and whether their activities should be restricted or banned altogether, as the U.S. Securities and Exchange Commission is proposing.
Bolstering that concern was the largely unnoticed flip side of the disclosure: Another 300 funds managed to get CalPERS’ business without assistance from middlemen.
That kind of direct dealing between CalPERS and potential investment partners should be the norm, said Joseph Dear, who took over as CalPERS’ chief investment officer in March just as financial markets precipitously plunged.
“I don’t want any manager, particularly at emerging or smaller funds, to feel they can’t get a proposal to CalPERS because they don’t know what door or what portal to use,” Dear said.
He told his staff to make it as easy as possible for all investment managers to pitch their products without feeling compelled to hire someone to introduce them to key players at CalPERS’ sprawling, two-building campus in Sacramento.
Dear said he was making the application process more accessible and understandable and “communicating as clearly as we can to the market what investment products and services we’re interested in and why we make the investment choices that we make.”
With an investment staff of about 250 people, plus a number of contracted advisors, CalPERS has “plenty of capacity to receive, review and respond to investment proposals,” he said.
The open-door policy could help more potential investment partners get a fair hearing from CalPERS without paying placement agent fees.
That’s the kind of experience Cartica Managementof Washington, D.C., said it had when it closed a $200-million deal with CalPERS last year.
“They reached out to us,” said Steven J. Quamme, the managing director and chief operating officer for the fund, which specializes in international emerging markets. “We have an experienced team of emerging-markets investors, and CalPERS’ staff knew about us,” he said. “So they contacted us about an investment as they looked to increase their emerging markets exposure.”
But in some instances placement agents can be a help to investment managers, Quamme cautioned.
“There clearly have been a number of abuses where so-called placement agents have acted improperly and illegally,” he said. But there’s nothing inherently unseemly about hiring a placement agent to represent an investment fund, Quamme said, especially when vying for business from smaller pension systems that don’t have the large investment staffs and outside consultants that CalPERS boasts.
Making CalPERS more accessible “is a step in the right direction . . . but won’t be a complete solution,” added Bill Elkus, the founder and managing director of Clearstone Venture Management. The Santa Monica venture capital fund received a $25-million investment commitment from CalPERS in 2004 without a placement agent.
But Elkus said he wouldn’t rule out using a placement agent in the future.
“As a practical matter, one of the functions of a good placement agent as opposed to a bad one is a screening function,” Elkus said. “It’s not access that’s the issue. It’s getting their attention in the sense of competing against all the other noise that exists in their universe.”
But Mercer Bullard, a securities law expert at the University of Mississippi School of Law, doesn’t think that anyone should have to pay a placement agent for “access that they acquired when they worked for CalPERS.”
One such middleman, Alfred J.R. Villalobos, served on the CalPERS board in the 1990s and has been paid around $60 million in fees by investment managers he helped at CalPERS.
Disclosure of the fees paid to Villalobos galvanized the CalPERS board and other California policymakers. Since then, the board has tightened controls on placement agents and backed a proposal to be introduced in the Legislature to make them register as lobbyists. The bill could severely limit the fees fund managers pay placement agents by outlawing commissions that can run into the hundreds of millions of dollars.
The measure also would prohibit placement agents from making campaign contributions to pension board members.
Assemblyman Edward Hernandez (D-West Covina), the likely sponsor of a CalPERS-backed lobbying bill, said he preferred regulating placement agents to a total ban. “There’s a place for them” under some circumstances, he said.
And state Treasurer Bill Lockyer and Controller John Chiang, who sit on the 13-member CalPERS board, for now, say they would rather register placement agents as lobbyists than prohibit them.
The board has taken a neutral stance on the SEC’s proposed ban.
In the end, investment funds are probably better off if they have a direct relationship with the pension funds they partner with, said Paul Klingenstein, managing general partner of Aberdare Ventures, a small San Francisco firm that manages about $100 million of CalPERS healthcare-technology investments.
“We have a decade of performance, and our investors know us,” Klingenstein said. “We don’t think we would be well served by intermediaries who put together a relationship.”
