Placement agents: Big fees for big money

Placement agents have collected handsome fees for helping private equity firms get investments from CalSTRS, a new report shows, and among them are two California placement agents mentioned in a New York pension scandal.

New York Attorney General Andrew Cuomo, who has concluded that placement agents are a bad idea, is pushing a code of conduct that would ban them.

But a CalSTRS staff report says placement agents, seldom used by large firms that have their own marketing staff, can be important for “smaller and especially diverse firms” seeking money from pension funds.

The report includes a defense of placement agents from a partner in a small private equity firm. Nicholas Bienstock of the Savanna Real Estate Fund tells how his firm was aided by a placement agent and argues that a ban could harm pension funds.

The spotlight was put on the littleknown but lucrative placement agent business after two officials were charged with taking kickbacks for arranging investments from the New York state public employees pension fund.

Placement agents help private equity firms seeking investments from pension funds make their sales pitch, often providing introductions and marketing advice. The fees, typically 2 percent of the investment, are paid by the firm, not the pension fund. The California State Teachers Retirement System was able to respond to a request for information about placement agents from state Treasurer Bill Lockyer because of a fee-disclosure policy adopted three years ago.

The California Public Employees Retirement System did not adopt a feedisclosure policy until last month and is reviewing Lockyer’s request. As state treasurer, Lockyer sits on the CalPERS and CalSTRS boards.

The new CalSTRS report shows that about 20 placement agents collected around $38 million in fees (some in foreign currency) for $5.2 billion in investments made by the pension fund since the fall of 2006.

Gold Bridge Capital of San Francisco, controlled by Sacramento lobbyist Darius Anderson, received a $400,000 fee from the Stockbridge Real Estate Fund for a $100 million investment from CalSTRS.

The Sacramento Bee reported last month that Gold Bridge received a $2.25 million fee for a $150 million investment Stockbridge obtained from a New York pension fund.

The Bee said Anderson and Terry Fancher of Stockbridge each made $25,000 campaign contributions to former New York Comptroller Alan Havesi, who controlled pension fund investments. Fancher added another $25,000 contribution later.

The new CalSTRS report shows that Wetherly Financial, a Los Angeles firm run by Dan Weinstein, received a $150,000 fee for a $30 million investment in Nogales Investors Fund II. Wetherly has been mentioned in the New York probe.

The Los Angeles Times reported last month that California Attorney General Jerry Brown issued subpoenas for documents from Gold Bridge and Wetherly in his own probe of placement agents.

The placement agent business has been growing, according to a London-based research firm, Prequin, quoted in a Reuters story. Among the private equity firms that raised funds last year, 54 percent used a placement agent, up from 45 percent in 2007 and 40 percent in 2006.

“Placement agents are . . . professional outfits, which are very valuable to the private equity industry and provide them with a number of services,” Tim Friedman, a Prequin spokesman, told Reuters.

Two “brand name” placement agents mentioned in the story are in the CalSTRS report. Credit Suisse is the agent in eight investments, receiving  one of the biggest fees, $3.5 million, for $100 million by Capmark Structured Real Estate Partners.

Park Hill, a subsidiary of the Blackstone Group private equity and hedge funds, received a $3.7 million fee for a $196 million CalSTRS investment in the CVI Global Value Fund.

The New York attorney general, Cuomo, has organized a “multi-state task force” with representatives of 36 state attorney generals, including California, to explore pension fund corruption.

When the New York State Teachers Retirement System banned the use of placement agents, Cuomo issued a statement last month saying he hopes his code of conduct becomes an “industry-wide” model for reform.

“Hopefully, the NYSTRS announcement today will serve as another building block in our effort to promote needed reforms,”Cuomo said, “like banning the use of placement agents and eliminating campaign contributions to those who make or influence pension fund investment decisions.”

Cuomo also announced last month that the Carlyle Group, which has several billion dollars in investments from CalPERS and CalSTRS, agreed to pay a $20 million settlement to the state of New York.

The investigation found that most of a $13 million payment made by Carlyle became a placement fee to a firm controlled by Hank Morris, one of the Hevesi aides charged in the probe.

As part of the settlement Carlyle also agreed to stop using placement agents. In the defense of placement agents attached to the CalSTRS report, Bienstock says it’s “not surprising” that Carlyle adopted the ban.

“It would not apply to their own inhouse placement agent team and would reduce their competition for pension fund dollars,” Bienstock said.

There has been no push to ban the use of placement agents in California.

But a bill sponsored by Treasurer Lockyer, AB 1584, was introduced last week that would require all public employee retirement systems to adopt a fee-disclosure policy for placement agents.

Placement agents also would have to disclose campaign contributions made to elected pension board members during the previous two years and the period in which payment is received for an investment.

The bill is an urgency measure authored by the Assembly Public Employees, Retirement and Social Security Committee chaired by Assemblyman Ed Hernandez, D-West Covina.