Pennsylvania treasurer candidate calls for placement-agent ban

A ban on placement agents working with Pennsylvania’s two public pension funds could be in store.

A candidate for state treasurer called for a ban on third-party marketers like placement agents from interacting with investment staff at investment funds controlled by the Commonwealth of Pennsylvania.

This would include the almost $25 billion Pennsylvania State Employees’ Retirement System and the around $48 billion Pennsylvania Public School Employees’ Retirement System – both major private equity limited partners.

“We need an immediate ban on third-party marketers,” Democratic candidate Joe Torsella said in a statement April 28. “Pennsylvanians need to be able to trust that their money will be managed with fairness and integrity, uncompromised by conflicts of interest, political affiliations, favoritism or other unfair considerations.”

Torsella’s opponent, Republican Otto Voit, told the Philadelphia Inquirer he opposed the use of third-party marketers. “I won’t need them. I’m not going to use them,” he said, according to an April 29 report in the Inquirer.

An outright ban on placement agents could be detrimental to Pennsylvania’s investment program by limiting options, said Pam Hile, a spokeswoman with Pennsylvania State Employees.

“Eliminating investments from consideration because a placement agent is involved could dramatically shrink the investable universe and adversely impact diversification and portfolio quality,” she said.

Voit and Torsella will face off in an election on November 8.

Pick up the phone

Torsella rejected the idea that the pensions could lose out if placement agents are banned.

“If you are institutional quality and a best-of-class firm, there’s no need for you to hire someone to meet us. Just pick up the phone,” he said in an email statement Monday.

“We have over $70 billion between our two pension funds and a full team of staff and consultants that are plugged into the investment management community. This should not present a challenge to investment staff; if anything, this allows the staff to be free to use their expertise and do their jobs without the additional burden or specter of political influence and favoritism,” Torsella said.

Placement agents have been tainted by situations where political fixers demanded phony finder’s fees from investment firms in exchange for commitments from public pensions. This led to major investigations in New York, New Mexico and California. A handful of private equity firms like Levine Leichtman Capital Partners and Riverstone Holdings paid millions to settle their cases with the SEC.

In Pennsylvania, the push for a ban in Pennsylvania comes as one of the state’s former treasurers, Rob McCord, admitted to wearing a wire for the FBI and recording conversations with third-party marketers to help federal prosecutors investigate pension pay-to-play, the Inquirer said in the article.

McCord is awaiting sentencing after he pleaded guilty in 2015 to attempted extortion, the Inquirer said.

Specifically, the Inquirer said McCord recorded a conversation with Richard Ireland, a founder of Valley Forge Investment Corp, which worked with investment firms trying to win business with the state pensions. Ireland has not been charged with wrongdoing. His attorney, Joshua Lock, did not respond to questions Monday.

Pennsylvania State Employees has seen the number of firms using placement agents to market their funds dwindle as its relationships with its core GPs mature. Those GPs no longer need to go through marketers to get access to the pension. Last year, the system committed to six funds that used placement agents, according to Pennsylvania State Employees  spokeswoman Hile.

“Good placement agents market investment products, and they help facilitate efficient information exchange between the investment manager and potential investors, which is useful when non-U.S. investments are under consideration,” Hile said.

“Placement agents do not inherently taint the investment process — they are no different than a homeowner hiring a real estate agent to sell a house.”

At Pennsylvania State Employees, GPs must disclose their use of placement agents, who they are and the fee arrangement, Hile said. Pennsylvania State Employees has a longstanding practice of not reimbursing GPs for use of placement agents — some GPs charge LPs for placement-agent use.

At most funds, however, some percentage of these types of fees — placement agent, board, transaction and monitoring — goes to offset the management fee. That percentage has crept up over the years and GPs now routinely use 100 percent of such fees to offset management fees.

Evelyn Williams, a spokeswoman for Pennsylvania Public School Employees, did not respond to requests for comment.

Past indictments

Other states have banned placement agents from working with their public retirement funds.

In California, placement agents have to be registered as lobbyists to work with pensions. They are banned outright in New York and Illinois. The SEC also tried to institute a federal ban on placement agents working with public funds, but that became watered down over time to regulate agents’ interactions with public systems after making political contributions.

Some say that banning placement agents from working with public pensions places a heavy burden on pension officials to find GPs. This is especially true at understaffed systems, like Pennsylvania State Employees, where, after a series of departures, only one person, David Felix, is on the private equity team (though the state is hiring more).

However, as big LPs work to consolidate their private equity portfolios and keep relationships only with their best performers, this becomes less of an issue, according to an LP.

“Since most large plans have been shifting to a focus of more concentrated names, usually to a larger manager who can take large checks, [there’s not] much of an impact,” the LP said.

The LP added, however, that such bans could have more impact on a system’s ability to find smaller funds that could turn into the next superstars years down the line.

Action Item: Check out Joe Torsella’s statement on placement agents here: http://bit.ly/26MbEky

Photo courtesy of Torsella campaign