Pacific Corporate Group Takes Steps To Achieve Stability

The talent that has fled Pacific Corporate Group in the last 18 months could field a private equity all-star team.

Former employees have variously started up their own firms, joined rivals, and signed up with industry powerhouses such as Macquarie Bank. Others are waiting out their non-compete agreements before resurfacing.

The defections, many of which seem to be rooted in disputes over money and the direction of the firm, have jeopardized essential relationships for 28-year-old PCG, the La Jolla, Calif.-based firm that advises several of the nation’s largest pension funds on leveraged buyout funds and other alternative investments. Stripped of its primary point of contact with PCG, long-time client California Public Employees‘ Retirement System recently threatened to sever ties. Two other clients, Oregon Investment Council and the Illinois Teachers’ Retirement System, responded by putting PCG’s advisory contracts out to bid. A spokesman for New York City Retirement Systems has said officials are “concerned and monitoring the situation,” according to published reports.

Now Christopher J. Bower, PCG’s founder and CEO, is trying to right the ship, in part by making employees shareholders. Late last month, he spun off PCG’s advisory unit into an independent company, PCG Asset Management LLC, whose clients have some $15 billion in alternative investments. Bower will own 50 percent of the new company, while employees will have the opportunity to own up to 50 percent of the remainder. Their ownership stake starts at 25 percent.

“It creates a culture of owners rather than employees,” Bower said. “We think that creating that additional level of professionalism, of interest, of ownership, is something that is a plus in terms of maintaining and attracting new employees.” PCG Asset Management, which employs 18 professionals, answers to a board that consists of Bower, three outside directors, and a director that will be elected in coming months by the new employee-shareholders. Bower painted the spin-off as an “institutionalization” of his 2005 decision to form a separate asset management business unit within PCG.

Needless to say, creating a stable institution, with a stable list of clients, has to be a priority for a firm that commits to 10-year partnerships on its clients’ behalf. And despite a history of turnover, PCG has been unusually successful at it, with a client list spanning from coast to coast. CalPERS has been an 18-year client, Oregon a 15-year client, the Rhode Island State Treasury a 12-year client and the New York City pension fund a 10-year client. The firm was an early investor in blue-chip buyouts shops such as Providence Equity, First Reserve Corp. and Leonard Green & Partners.

PCG Asset Management, which provides discretionary management and advisory services and manages funds of funds, is now managed by David Fann, who directs research operations, and Michelle Davidson, who’s in charge of client services. PCG Capital Partners, also run by Bower, makes direct investments in companies through its own fund or through co-investments. Both entities fall under the umbrella of Pacific Corporate Group Holdings, the company Bower founded in 1979.

One Client Encouraged

In the short term, the spin-off appears to have repaired PCG’s bond with CalPERS.

In prepared statements, two CalPERS officials praised the new governance structure and lauded PCG’s investment advice. A day after PCG Asset Management was declared an independent company, CalPERS announced it had awarded PCG two $400 million mandates—one to manage investments in emerging markets and the other to oversee investments in clean technologies that reduce carbon emissions and preserve natural resources.

A good start, though it’s unclear whether PCG will be able to salvage relationships with the two clients that have issued RFPs. Eva Goltermann, a spokeswoman for the Illinois Teachers’ Retirement System, declined to comment, citing the fact that the RFP process was still under way. The board expects to select a new advisor on May 18, she said. Ley Garnett, a spokesman for the Oregon Investment Council, said the spin-off “finalizes what we’d previously been told” PCG would do, but declined to comment further. The council plans to choose an advisor in April.

Presumably both pension funds could re-hire PCG, and there’s ample reason to believe they will do so. Citing an independent audit by Deloitte & Touche, PCG has produced a 17.5 percent annual rate of return in nearly 20 years of managing what is now a $15 billion pool of alternative investments for big pension funds, Bower said. He called the performance “unparallelled” and “unsurpassed,” and the product of what he deemed a proprietary investment process.

“With that kind of consistent out-performance with that much capital over that long a period of time, we really know of no other firm that has posted those types of numbers,” Bower said. “That’s the sort of stuff of why we have such great client loyalty.”

Bower also said that spinning off the PCG Asset Management unit, while achieving important goals for the firm, was “absolutely” not a requirement in order to keep its contracts. “Clients were certainly interested in it, and wanted to make sure we would keep our word, and do what we said we were going to do,” Bower said. But, he added, “there was no gun held to our head, and there was nobody that was forcing us to do things or operate in a fashion.”

Latest Bout Of Turnover

Even before this latest round of departures there was an earlier staff exodus that took place in the fall of 2005, when five executives walked out of PCG. Two of them, Scott Vollmer and Craig White, went on to establish Drum Capital Management, a distressed opportunities fund-of-funds manager. Another, Peter Martenson, created Macquarie’s private equity franchise in the United States. He brought with him two other PCG veterans, Eric Becker and Rick Fratus.

Then, last fall, a quartet of managers at the top of the asset management business unit left, leading to strained relationships with several clients. They were Tara Blackburn, who served as chief liaison between PCG and two of its biggest clients, the Oregon Investment Council and CalPERS; Monte Brem, who led the asset management unit; and managing directors Michael Russell and Stephen Moseley. The blood-letting wrapped up in December, when Bower fired the heads of the asset management unit brought on to replace them, David Scopelliti and Tom Keck.

Ex-PCG professionals who spoke to us on condition of anonymity said they chafed under what they considered Bower’s unwillingness to cede authority over the strategic direction of the firm, or to share more of the wealth that the firm was creating. One ex-employee, clearly still smarting, was even skeptical that the spin-off will really improve the lot of PCG employees. “Nothing’s changed,” the ex-employee said.

Bower naturally sees the turnover in markedly different terms. “Turnover is something that happens from time to time, and it is a fact of life,” he said. “At times, an individual’s personal or economic or other goals might diverge from those of the company.”