State pensions probe tainted pledges

Three state pensions funds, including the largest nationwide, 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 investments.

The reviews by the New Mexico Educational Retirement Board, New Mexico State Investment Council and California Public Employees’ Retirement System cover more than $5 billion in commitments to more than 50 firms.

It is not clear if the New York State Common Retirement Fund is reviewing pledges since it declined to comment.

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, says Bob Jacksha, CIO of New Mexico Educational Retirement Board.

Among the funds recommended by Aldus Equity Partners during its tenure as consultant are Apollo Investment Fund VII, Ares Distressed Securities Fund and Levine Leichtman Fund IV.

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.

Jacksha believes Meyer’s cooperation with authorities in the ongoing investigation of the New York pay-to-play scandal 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 says. “The politically connected individuals in New Mexico were not ERB staff.”

Jacksha adds 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 does 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.

At CalPERS, it’s not yet clear how the state pension fund will handle private equity pledges recently discovered to be problematic. Although CalPERS was 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, 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 each 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% 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 fund-raising activities.”

“We’re not commenting on what we may or may not do about private equity commitments,” says 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.”