Middlemen got $125 million-plus from investors for arranging CalPERS deals
Private investment funds paid more than $125 million in fees to scores of middlemen who helped them win business with California’s giant public pension fund, a practice that has been the focus of a lengthy investigation, according to documents released this morning.
FOR THE RECORD:
An earlier version of this online article said the California Public Employees’ Retirement System asked for information about the use of placement agents after a corruption scandal in New York last year and after the disclosure that placement agent Arthur J.R. Villalobos had received big fees for pitching clients, including Apollo Management of New York and CIM Group of Los Angeles, to the pension fund. In fact, CalPERS acted after the New York scandals. The Villalobos disclosures, including his role with Apollo and CIM, came later, after CalPERS requested information about placement agents.
The California Public Employees’ Retirement System has invested in private funds represented by the middlemen, or placement agents, for more than a decade, but today CalPERS released thousands of pages of documents that offered the first significant details about the widespread practice.
Among those who were paid to seek business deals with the public pension system were two former CalPERS board members, Alfred J.R. Villalobos and William D. Crist, the records show.
Villalobos’ company, ARVCO, received $58.9 million in fees, by far the most paid to any of the middlemen, the records show. Counting fees paid for helping the funds get business with the state teachers’ pension fund, Villalobos has received more than $70 million in fees.
London-based investment firm Governance for Owners paid former board member Crist about $844,000, the records show. The firm currently invests about $200 million of CalPERS money. Crist, a retired economics professor at Cal State Stanislaus in Turlock, served on the board from 1987 to 2003 and presided as president for 11 of those years.
CalPERS declined to comment on Crist’s relationship with the London firm, where he is a partner and current chairman of the board. But both the fund’s chief executive and Crist stressed that the former CalPERS board president does not easily fit what they say is the definition of a placement agent.
CalPERS relationship with the fund started in late 2006, more than two years after Crist left the board. California law prohibits former government officials from lobbying their previous employer for one year after leaving state service.
“I never did think of myself” as a placement agent, Crist said. “I hate the appearance of that. I don’t think I was particularly central to the CalPERS investing.”
But the fund’s most recent agreement with Crist and previous agreements state that “you may introduce to us prospective investors based in California and elsewhere in the USA,” a role generally played by placement agents that help investment fund managers get business with public pension funds.
CalPERS, the nation’s largest public pension system, manages retirement benefits for more than 1.6 million public employees, retirees and their families.
Concern about payments to placement agents erupted last year after a bribery and corruption scandal in New York.
In response, CalPERS asked the funds in which it invests to disclose their payments to placement agents. The fee disclosures released this morning arrived between May and this month, CalPERS said in a news release. The fees made public today cover private investment fund dealings with CalPERS over the last decade.
Anne Stausboll, CalPERS chief executive officer, said the pension fund has retained a law firm to investigate the role that placement agents have in getting CalPERS business.
“Gathering information is not enough. We remain firmly committed to pursuing a full and fair examination that the special review will provide, and to backing legislation that would remove contingent fee arrangements and require placement agents to comply with the same rules as lobbyists,” Stausboll said.
Under California law, former CalPERS board members and staff are allowed to lobby their former employer one year after leaving the pension agency, but some critics say the practice raises ethical concerns and has the potential for abuse.
“The fact that people are being lobbied by people who have relations with current board members, even though they are former board members, is totally inappropriate,” said Dave Elder, a former state assemblyman from Long Beach who monitors CalPERS for public employee unions.
Lobbying by former board members could put undue pressure on investment staff to invest with funds that might not be the best choice, Elder said.
Another highly paid placement firm was Wetherly Capital, which received nearly $6 million for pitching investments to CalPERS, the records show. Wetherly was one of several firms that came under scrutiny last year from New York Atty. Gen. Andrew Cuomo, who already secured several guilty pleas in a kickback scandal in that state’s retirement system.
Wetherly represented several investment funds, including Ares, CityView, Yucaipa and Levine Leichtman, the records show.
Of the $5.9 million received by his firm, $4 million came from Shamrock Holdings, according to CalPERS records. Dan Weinstein, Wetherly’s managing partner, said Shamrock’s payment was larger because it was an established firm that secured a large commitment from CalPERS -- $200 million.
“Most of our clients hired us because they were smaller firms, or spinning out from a larger firm to launch a first-time fund,” Weinstein said. “In most cases, those firms did not have the resources to employ an in-house marketing team, so they outsourced those responsibilities to us.”
Last May, the CalPERS board decided to start collecting information from about 600 private investment partners about the identity of the placement agents they employed, the investments they helped promote and the fees they received.
Those financial relationships also are being probed independently by the U.S. Securities and Exchange Commission and the attorneys general of California and New York state.
The Villalobos disclosures and the new CalPERS documents are expected to heighten calls to tightly regulate placement agent activities in California and, possibly, eliminate them altogether. In December, the CalPERS board proposed legislation that would make placement agents register as government lobbyists. The proposal would also prohibit them from being paid by commissions instead of flat fees, and those payments would have to be made public.
The board has also instituted a new policy forbidding its members from dealing directly with the outside sales pitchmen.
