Limited partners affected by the pay-to-play scandals have finally moved past the problems created by the fiasco or are close to resolving them, and are now back to making pledges, often working with new private equity consultants, after having to replace those caught up in wrongdoing.
Institutional investors had to slow their pledge paces, find new consultants and create new rules in the wake of the scandal that rocked the industry starting in April 2009. The debacle involved placement agents and kickbacks to pension fund staff and consultants in return for private equity pledges. Central to the scandal was Aldus Equity Partners, a private equity consultant, whose founder pleaded guilty in connection with kickbacks involving sham placement agents and the
Some of the LPs affected by the events, such as the
The New Mexico State Investment Council’s entire private equity program was thrown off kilter by the scandal. The LP used Aldus Equity Partners as its private equity consultant until the firm imploded. The council hasn’t made a private equity pledge for almost two years due to the fallout from the scandal, causing concern about “missing vintage years,” said Charles Wollmann, a spokesman. However, the state is finally moving forward. Its private equity investment advisory committee voted recently to approve a $275 million private equity allocation target for the coming year, to be divided among six managers. In addition, the LP’s interim private equity adviser, NEPC, will bring one or two fund proposals to the committee in November, which would then require approval of the full council. “We’re not quite back on the horse yet, but we do have a hand on the saddle,” Wollmann said.
Other LPs did not necessarily slow their pledge paces, but had to divert a lot of time and attention to finding new private equity consultants and devising new rules to prevent this type of event from occurring again. For example, the Los Angeles Fire & Police Pensions made three private equity fund pledges in April 2009, after the scandal broke, on the recommendation of consultants StepStone Group and Aldus Equity. Then in May 2009, the LP fired Aldus Equity. Adding to the distraction, that same day, Fire and Police Pension Commissioners Sean Harrigan and Elliott Broidy resigned. In December, Broidy pleaded guilty to a felony for bribing four officials in the New York state comptroller’s office. It took nearly a year for the LP to replace its private equity consultant, hiring Portfolio Advisors in March 2010. The LP now requires the disclosure of contributions, gifts and other potential conflicts of interest by placement agents and requires disclosure of compensation regarding the use of intermediaries to secure an investment.
New Turns In Scandal
In the latest developments, the California Public Employees’ Retirement System is dissolving its connections to long-time private equity adviser Pacific Corporate Group, known as PCG, without explanation. But concerns have surfaced regarding PCG’s relationship with former CalPERS board member turned placement agent Alfred Villalobos. According to an Aug. 19 story in the Sacramento Bee, Villalobos helped PCG in 2007 when CalPERS became worried over the departure of three PCG executives. Villalobos smoothed things over with CalPERS for a $1 million fee, said the article. In 2007, PCG CEO Christopher Bower convinced CalPERS to invest $600 million in Apollo, one of Villalobos’s largest clients, for which Villalobos got a $13 million commission, said the article. A civil complaint filed in May by California’s attorney general alleges Villalobos attempted to bribe CalPERS officials into making investments, including with Apollo, from 2002 to 2008.
Although the mess might have put a crimp in CalPERS’s activities, it has neatly handled the fallout. A previous joint venture partner with PCG, Aviva Capital LLC, will still run the more than $1 billion in two emerging markets funds. Capital Dynamics will manage the $480 million
On the opposite coast, former New York State Comptroller Alan Hevesi pleaded guilty this month to receiving almost $1 million in gifts in return for approving a $250 million pledge to
The scandal has seriously hurt the private equity industry, especially legitimate placement agents, with New York banning GPs from paying intermediaries for introductions to public pension funds. California just passed a law saying placement agents must register as lobbyists, who are not allowed to make campaign contributions or collect fees, effectively shutting the door on placement agents, who receive commissions on the pledges they gather. And new rules require the New Mexico State Investment Council not to make any commitment to a GP represented by a third-party sales agent who will be compensated as a result of the investment.
“All of this has caused a lot of anguish for placement agents and also for the GPs that rely on them,” said Charles Eaton, founder of Eaton Partners, a Connecticut-based placement agency. But “as a result, it has already begun to get rid of the two-bit players that don’t belong in our business and who are siphoning off a lot of money for no value added,” he said.