Pensions Probe Tainted Pledges

The New Mexico Educational Retirement Board, New Mexico State Investment Council and California Public Employees’ Retirement System are reviewing private equity pledges made in connection with recent pay-to-play scandals, raising questions about whether they may try to recover any of their money. The reviews by the three pension funds cover more than $5 billion in commitments to more than 50 firms–see accompanying tables. A fourth pension fund, the New York State Common Retirement Fund, will not comment on anything related to the scandal, so it is not yet clear if it is reviewing pledges.

NEPC, a consultant to the $7.5 billion New Mexico Educational Retirement Board, is conducting a review of the 20 private equity pledges made via the limited partner’s former private equity consultant, Aldus Equity Partners. In pleading guilty in connection with a New York State Common Retirement Fund kickback scheme on Oct. 2, Aldus Equity founder Saul Meyer issued a statement saying that he “ensured that Aldus recommended proposed investments that were pushed on him by politically-connected individuals in New Mexico, knowing that these politically-connected individuals or their associates stood to benefit financially or politically from the investments and that the investments were not necessarily in the best economic interest of New Mexico.”

NEPC, which in July took over management of the New Mexico private equity program with a six-month contract, plans to issue a report detailing results of its review in December, said pension fund CIO Bob Jacksha. Among the funds recommended by Aldus Equity Partners during its tenure as consultant are Apollo Investment Fund VII LP, Ares Distressed Securities Fund LP and Levine Leichtman Fund IV LP.

A decade ago, several private equity firms involved in a similar pay-to-pay scandal in Connecticut ended up returning money to the state, or reducing the size of the state’s commitments, including The Carlyle Group, Crescendo Ventures, Pharos Capital Partners and Pioneer Ventures Fund. The former treasurer and sole fiduciary of the state’s pension fund, Paul Silvester, had earlier pled guilty to accepting payoffs and campaign contributions in exchange for pledging money from the Connecticut Retirement Plans and Trust Funds to private equity and other funds. Altogether the pension fund negotiated with general partners to shrink its exposure to private equity from a 20 percent allocation to 11 percent. In addition, after current Connecticut Treasurer Denise Nappier defeated Silvester in the 1998 race for the post and the scandal broke, she imposed a three-and-a-half year moratorium on new private equity commitments. The state did not re-enter the private equity market until 2003.

New Mexico Educational Retirement Board CIO Jacksha believes Meyer’s cooperation with authorities in the ongoing investigation is a positive development because it will help resolve the situation more quickly. “He has now admitted that he withheld information from us and misled us,” Jacksha told Buyouts. “The politically connected individuals in New Mexico were not ERB staff,” he added. “Staff acted in a proper manner and worked with Aldus to try to get proper disclosure. We were thwarted in that they withheld information or gave us wrong information.”

Jacksha added that just because Meyer recommended a commitment does not mean that the pension fund acted on that recommendation. In fact, the board rejected about 10 of Aldus Equity’s recommendations for various reasons. One had gone through the approval process, but the terms were not satisfactory; with others, the staff didn’t like the investment proposition. Jacksha did not know what the legal ramifications would be if any of the 20 Aldus Equity-led pledges turn out to be some of the investments that Meyer referred to as “not necessarily in the best economic interest of New Mexico,” because they have already signed limited partnership agreements for those pledges.

The $12 billion New Mexico State Investment Council, meantime, had used Aldus Equity Partners as its private equity consultant until April, when the governor ordered ties with the adviser cut. Former state investment officer Gary Bland, in an interview the day before his resignation on Oct. 21, told Buyouts, “I understand the serious issues raised by the NY investigation and why they raise concerns.” However, three separate agencies are investigating the issues as they relate to New Mexico, and an independent performance review is now under way, so “it might be wise to wait for results and not rush to judgment,” said Bland.

Bland noted that the investment office staff, the private equity investment advisory committee and state investment council all reviewed Aldus Equity’s recommendations, which, for various reasons and on several occasions, were rejected. Though many of the investments that were made are still in the J-curve, explained Bland, the private equity portfolio so far has achieved above-average returns versus the sector’s benchmarks. Additional assessment of individual funds and agreements is ongoing, and “as potential litigation issues are in play,” said Bland, he felt it was inappropriate to comment on the status of any specific fund.

Over at the $200 billion CalPERS, it’s not yet clear how the nation’s largest pension fund will handle private equity pledges recently discovered to be problematic. Although not a client of Aldus Equity, CalPERS is looking at payments of more than $50 million made between 2003 and 2008 to ARVCO Financial Ventures LLC, a firm headed by former CalPERS board member Al Villalobos, who served on the pension fund’s board between 1993 and 1995. Apollo Management, Ares Management and Aurora Capital Group all paid fees to ARVCO. In a prepared statement, Ares said it used ARVCO only for its initial private equity fund in 2003, paying the firm $1 million. It has not used ARVCO since then. The fees paid by Apollo are especially troubling because CalPERS owns a 10 percent stake in the buyout shop, purchased in 2007, and thus would apparently have no reason to pay a middleman to help obtain commitments. In a letter sent to LPs on Oct. 22 Apollo said, “We do not believe there is anything innately improper in using placement agents in fundraising activities.”

“We’re not commenting on what we may or may not do about private equity commitments,” said CalPERS spokesperson Clark McKinley. “Of course fees paid to placement agents aren’t in question since CalPERS didn’t pay the fees. In such cases, we always consider our options, keeping in mind the best interest of our investment program and CalPERS members,” he added.

At the New York State Common Retirement Fund, as of July Carlyle Group, Riverstone Holdings LLC, and private equity consultant Pacific Corporate Group had agreed to pay fines ($20 million, $30 million and $2 million, respectively) to the state to resolve probes of their actions regarding the kickback scheme. In September, Access Capital Partners, Falconhead Capital LLC, HM Capital Partners and Levine Leichtman Capital Partners agreed to return more than $4.5 million combined to the New York State Common Retirement Fund, according to New York’s Attorney General Andrew Cuomo.