Investment firms paid placement agents more than $125 million in fees to win business with the California Public Employees’ Retirement System, including nearly $59 million to a firm led by a former board member of the pension fund, CalPERS said on Jan. 14.
The biggest U.S. public pension fund, reporting the findings of its review of the role of the middlemen, said the data made the case for more regulation of placement agents.
CalPERS got information from more than 600 placement agent disclosures. Agents’ activities at CalPERS and other public pension funds have raised concerns about conflicts of interest potentially influencing investment decisions.
Placement agents act as middlemen between pension funds looking for places to put their money and private equity funds seeking investments. Agents typically take a percentage of the funds they raise as a fee.
Interest in these arrangements has increased as a result of a pay-to-play probe in New York that uncovered a web of connections between politically-connected placement agents, investment firms and public retirement systems, notably ones in New Mexico and California.
With more than $200 billion in assets and a penchant for private equity investing, CalPERS drew attention from authorities tracking placement agent activity across the nation.
A probe by New York Attorney General Andrew Cuomo has resulted in five guilty pleas. California Attorney General Jerry Brown and the U.S. Securities and Exchange Commission are also looking into the activities of placement agents.
No charges have been brought in California against pension fund officials or placement agents and firms that hire them. But a number of deals have opened CalPERS to criticism, as it preached the virtues of good corporate governance at the same time a former board member’s firm was reaping a bonanza by helping investment firms win business at the fund.
CalPERS’ placement agent woes struck while it was trying to recover from steep investment losses that raised concerns about its investment strategies, and as activists ramped up efforts to highlight the cost to taxpayers of the state’s pensions.
Governor Arnold Schwarzenegger has said rising pension costs will severely challenge the state’s finances for years to come and should be reined in with less generous retirement plans for new public employees.
Push For Tighter Rules
CalPERS voted in November to approve staff recommendations to tighten its rules on placement agents, and the fund is supporting legislation that would require the middlemen to comply with rules for lobbyists.
“In light of recent questions raised about placement agents, we are working aggressively to take measures to provide transparency, adopt thoughtful reforms, and restore trust in our system,” Calpers Chief Executive Anne Stausboll said.
Ed Hernandez, chairman of the Assembly’s committee on state pensions, said he will work with CalPERS “to end the shadowy involvement of placement agents and remove the greed factor from public pension fund investments.”
Conflicts of interest must be prevented, said David Crane, a Schwarzenegger adviser who served on the board of the California State Teachers’ Retirement System, where he pressed for changes in 2006 to improve placement agent disclosure.
The system needs change to prevent political contributions from investment firms and their agents to board members from influencing investment policies, which have consequences for the spending on other state programs, Crane said.
“Any deal that they are pushed to do that they wouldn’t do is like taking money away from the University of California,” he said.
Following The Money
CalPERS’ review detailed compensation paid by investment firms to 10 companies providing placement agent services.
Topping that list was ARVCO, a placement agency led by Alfred Villalobos, who was on the CalPERS board in the 1990s.
ARVCO earned more than $58.9 million in fees. Its activities at CalPERS came to light last year, raising questions about Villalobos’ connections to key figures at the fund. ARVCO could not immediately be reached for comment.
Villalobos raised eyebrows for hiring former CalPERS Chief Executive Officer Fred Buenrostro, who left the fund in 2008. In addition, political contribution forms listed associates of Villalobos as donating funds to the 2005 reelection campaign of Charles Valdes to the CalPERS board.
Valdes has since left the board. He had been a member since the mid-1980s and was chairman of its investment committee at the time of the contributions from associates of Villalobos.
“As you can see from the disclosures, it is a lot of information,” CalPERS spokeswoman Pat Macht said on a conference call. “We think it makes a case for pursuing legislation to more rigorously regulate placement agents.”