I have written in previous articles concerning how big finance is now hunting to raid pension funds, especially large state based funds. That was back in November of last year I believe.
In April the corruption scandal at New York State’s public pension fund had broke and has now tainted multimillion-dollar investment deals in at least two other states – California and New Mexico. Pension systems are reacting with changes meant to cast sunlight on a shadowy system, particularly on the role of investment middlemen called “placement agents.” The agents work for a variety of investment management firms, large and small, that seek to manage a slice of the assets held by big pension funds. The agents’ fees can run into the millions of dollars and are usually not disclosed.
Who are the players?
Pension systems –Public retirement systems are some of the country’s biggest investors. The top three alone have combined assets of around $400 billion. They collect money from public employees – such as teachers, firefighters and police – as well as contributions from their employers, and invest that money with the aim of being able to pay for those employees’ retirement and other benefits. Professional staffers at the largest funds are typically overseen by a board that signs off on investment decisions and is often composed of elected politicians or political appointees.
Investment firms –The pension systems look to earn strong returns on their money while minimizing risk, and there are many investment-management firms that want their business. Some money-management firms emphasize traditional stocks and bonds, while others concentrate in real estate. Some are hedge funds, meaning they embrace a wide number of investment opportunities, including short sales, which involve selling borrowed stock with the expectation that its price will decline. Some are “private-equity” firms that raise money to buy undervalued businesses they can improve and resell at a profit.
Private equity boomed in the last 10 years, and many public pension funds pumped billions of dollars into these unregulated, opaque firms. The advantage to the pension funds was threefold: They liked being able to put money in investments that, supposedly, weren’t vulnerable to volatility in the stock market. The funds also liked the high returns many of these firms delivered – though performance has been affected by the global financial crisis. Finally, many public pension funds set aside money to invest in start-ups and investment-management firms owned by women and minorities.
Placement agents –Placement agents are the middlemen between the pension systems and the investment firms. Placement agents help investment firms pitch projects in return for large fees. Many placement agents are small boutique shops, but major investment firms and banking conglomerates also provide placement services.
What happened in New York? –New York Attorney General Andrew Cuomo alleges in an indictment that Hank Morris, a longtime political consultant, set up a pay-to-play scheme at New York state’s pension fund, which has assets worth $122 billion, according to the most recent data. Morris was an adviser to former state Comptroller Alan Hevesi. In New York, the comptroller has nearly unfettered control over investment decisions at the fund. Morris set up shop as a placement agent, working with a Connecticut firm, Searle & Co. In that role, he essentially was able to charge a commission for bringing clients to Hevesi
What does a placement agent normally do?
Placement agents help investment firms target funds that are likely to be interested in financial products the firm is offering, set up meetings with key decision makers and help craft marketing materials to sell the project. Many large financial institutions offer placement services. Morgan Stanley, for example, calls its service “Capital Introductions” and says it provides “strategic positioning” and “support throughout the process” of pitching a deal. The company boasts of “long-standing relationships” with hundreds of large investors, including pension funds.
How much do placement agents earn?
Typically, fees are between 1 percent and 2 percent of the total value of the investment. So if a client wins a $100 million commitment from a fund, the placement agent can pocket between $1 million and $2 million in fees, which are often undisclosed.
Are placement agents really necessary?
Many people have asked why good investment firms would ever need a placement agent. After all, shouldn’t professional pension fund staffers be able to size up potential investments themselves? What does a placement agent add?
Chris Ailman, the chief investment officer at one of the largest pension funds – the California State Teachers’ Retirement System (CalSTRS) – said placement agents can be helpful to smaller firms that don’t have a marketing staff or the time to spend promoting deals on the road. Ailman said the placement agents can be useful by steering investment opportunities to funds most likely to be interested: “Instead of getting 40 pitches from people where there’s no interest, you just get the projects that are likely to work.”
So, what’s the problem with placement agents?
The industry has suffered a series of corruption scandals. Experts cite two key factors: lack of transparency and the role of campaign contributions. Because placement agents are not hired directly by the pension funds, there has been limited disclosure of who is involved, fees they charge and what is done to earn them.
In 2006, CalSTRS, widely viewed as a model of transparency, began requiring investment firms to disclose the names of placement agents and fees they were paid. The information must be submitted before the system considers a proposed investment. Then, after reports that it did business with Morris and another firm named in the New York indictment, the California Public Employees Retirement System said it will draft new disclosure rules . CalPERS is the nation’s biggest public pension system.
How are New York, California and New Mexico connected?
Several of the players named in the New York indictment have done business in California and New Mexico. ProPublica reported that Wetherly Capital Management – a Los Angeles placement firm – split fees in New York and California with Morris
Two New Mexico funds have suspended their relationships with another fund manager, Aldus Equity, after it was cited in the Morris indictment. Meanwhile , investigators and law enforcement agencies from other states also expanded new joint efforts as the pay-to-play scandal continued to broaden.
Saul M. Meyer was arrested in New York and later released on bail, said Linda Lacewell, the lead New York prosecutor on the case. Meyer owns an investment management and advisory firm called Aldus Equity, which operates in multiple states, including New York, New Mexico, Oklahoma and Louisiana. It has $6 billion under management, according to a new Securities and Exchange Commission complaint filed today .
Meyer is alleged to have paid $300,000 in bribes to the man at the center of the scandal, Hank Morris, who was a political adviser to the former New York state comptroller, Alan Hevesi. Morris helped Meyer obtain a $375 million investment from the New York pension system, Cuomo said. Under the deal, Meyer agreed to kick back 35 percent of the fees he earned to a shell company owned by Morris, according to the Attorney General’s complaint. Morris would then split that money with a third party – another placement agent not named in the complaint.
The Securities and Exchange Commission took a step toward cracking down on “pay to play” schemes, barring investment advisers who want to manage public pension funds from donating to politicians who oversee the funds. The 5-0 decision by the SEC’s commissioners followed scandals in New York state and elsewhere in which investment advisers were accused of making political payments to help themselves get government business.
The agency backed off a related proposal that would have banned investment advisers from hiring so-called placement agents to help them secure pension-fund business.
In August, the Securities and Exchange Commission opened an “informal inquiry ” into the millions paid to placement agents who helped drum up business for investment funds hoping to manage Kentucky’s pension fund for state and county retirees.
The U.S. Securities and Exchange Commission, which regulates investment markets, has opened “an informal inquiry” into the Kentucky Retirement Systems’ use of middlemen known as placement agents.
The SEC’s Division of Enforcement in New York on Thursday sent a letter asking for documents from KRS, which oversees the $12.5 billion fund that provides benefits to state and county retirees.
Specifically, the SEC asked for a copy of an internal audit conducted this year that identified nearly $15 million in fees paid to placement agents, the middlemen who help private investment companies sell their products to KRS. The fees are paid by the investment companies, who then are paid by KRS.
Trustees of the Kentucky Employees Retirement System were shocked to discover that money managers paid $12 million to middle men to line up their fund as a client, it was revealed Thursday.
The public disclosure of the $12 million in payments over five years, including $5 million to a lone middleman, were made with results of a fund audit during a meeting of the $14 billion (assets) Kentucky Employees Retirement System’s investment committee.
This is the last bastion of America’s middle class nest egg. My question is that if these guys are this unscrupulous in just obtaining the business, then how are they managing the monies placed under their trust. I suspect nothing has changed since 2008 and quite frankly given the current market conditions, pension funds should weigh investments less and and look at innovative ways these funds could help stimulate growth and maybe participate in improving our education system and direct investments into businesses to stimulate growth. The next time you hear a politician carping that we don’t need more regulation in the financial community, remember the fox in the henhouse. Then tell him or her to get back to Washington and make sure the SEC does its complete job.