The $14.3 billion
The Kentucky pension holds $1.8 billion in private equity assets. Although no new private equity commitments were made in 2010, the pension’s new chief investment officer, TJ Carlson, told Buyouts that he anticipated making new commitments at some point in 2011.
The shift in power on the board came following the recent appointment of a new board member, Thomas Elliott, by Democratic Gov. Steve Beshear. The votes to replace Burnside and Overstreet were close. Burnside had been executive director since 2007 and was ousted in a 5-4 vote. He is being replaced on an interim basis by Bill Thielen, who has been KRS’s chief operations officer since 2006. Thielen will serve as interim executive director until a replacement is found following a national search.
Meanwhile, Overstreet, who has been on the board for 16 years, lost his board chairmanship in a 5-3 vote. Overstreet is being replaced by Jennifer Elliott (no relation to Thomas Elliott), who has served on the board for two years. Overstreet remains on the board.
“It was time for a change,” Elliott, the board’s new chairwoman, told Buyouts. “Our concern is for transparency to the board and to the public about the activities of the retirement system. The public needs to be confident that there is no insider dealing.”
Much of the rancor on the board revolves around New York-based placement agent Glen Sergeon, who from 2004 to 2009 received more than $5 million in fees from several private equity and hedge fund firms for sourcing hundreds of millions of dollars from Kentucky’s pension system. The $5 million paid to Sergeon was far more than that paid to any other placement agent, and included more than $2 million for a single, $200 million placement to a newly launched hedge fund, the Arrowhawk Capital Partners’ Durable Alpha Fund.
Such information was not revealed to the full board until August, when an internal audit disclosed the fees paid to Sergeon and the use of placement agents generally. Overall, $15 million had been paid to placement agents to secure Kentucky pension money.
But it was the relationship between KRS’s former chief investment officer, Adam Tosh, and Sergeon that drew the most focus. The audit revealed that the two had worked together on investment strategies when Tosh was the chief investment officer at the
And immediately prior to joining KRS, Tosh had worked at MDL, an investment advisory firm whose chief, Mark Lay, was later sentenced to 12 years in prison for making risky investments in a hedge fund that lost $216 million from the
The SEC’s inquiry into KRS began when the agency sought a copy of the state’s internal audit plus other documents surrounding KRS’s use of placement agents. The SEC has been particularly concerned about improper payments made to placement agents following pay-to-play scandals in California, New York and New Mexico. The SEC’s inquiry is ongoing.
While the audit report did not go so far as to accuse Tosh or Sergeon of acting illegally, the report did say this: “Due to this prior working relationship and the continuous use of Mr. Sergeon, there could be a perceived appearance of preferential treatment.”
Tosh stepped down in July, just one month before the audit results were revealed, and joined Connecticut-based investment consultant RogersCasey. TJ Carlson replaced him as CIO.
Carlson told Buyouts that even though “there is no ban on placement agents,” when it comes time for new commitments, any involvement by placement agents would have to be disclosed to the full board.
As for Burnside, who was Tosh’s boss, one of the main issues concerning the new board was transparency. Chris Tobe, a member of the KRS board, told Buyouts that he was unhappy about Burnside’s lack of disclosure. “Burnside and CIO Tosh knew about the $15 million that was paid to placement agents, but failed to disclose it,” he said, adding that the trustees did not know about the use of placement agents at all until the August audit report made it public.
Another reason, according to the Lexington Herald-Leader, was that Burnside had reached out to state lawmakers to quash a proposed ban on placement agents, as well as a proposal to impose term limits for KRS board members, both provisions of a bill in the legislature that ultimately failed to pass. Because Burnside, as executive director, reports to the board, one source told Pensions & Investments magazine that “at a minimum, he (Burnside) should have been neutral or silent.” Several board members supported the original bill, according to the Herald-Leader.
Attempts were made to reach both Tosh and Burnside, but calls were not returned.
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