Tag: conflicts of interest

Siedle: For Pension Funds, Private Equity Deals Can Come With Baked-In Conflicts of Interest

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Over at Forbes, the “pension detective” Ted Siedle has penned an extensive column delving into the contractually-permitted conflicts of interest that can accompany private equity deals.

He hones in on Bruce Rauner and his firm, GTCR, which handled assets for numerous pension funds. Rauner and GTCR encapsulate the secrecy and potential conflicts of interest that pension funds can sign off on when they hand assets over to private equity firms.

Siedle writes of Rauner:

According to a report by Council 31 AFSCME Illinois, a few years ago Rauner’s firm received millions in Pennsylvania state pension assets to invest after a $300,000 campaign contribution to that state’s Democratic governor. In Illinois, a company owned by Rauner paid a member of the Illinois Teachers’ Retirement System Board more than $25,000 a month. His firm was selected to handle TRS pension dollars. The TRS member, Stuart Levine, is now in federal prison for public malfeasance.

It seems Rauner mastered the art of accessing public pension assets to manage, including (according to his firm’s SEC filings) reliance upon placement agents which have proven to be so controversial at public pensions across the country.

In my opinion, before Rauner can be deemed fit to serve as governor of Illinois, an in-depth review of his secret dealings with state pensions is called for– especially since the state’s pensions are in a crisis (which merits investigation) and  4 out of the state’s 7 last governors ended up in prison. The last thing Illinois needs is to compound its pension problems.

If Rauner wins, expect questions about his past and ongoing private equity business dealings to continue to swirl. In my forensic experience, greater scrutiny of opaque investments always reveals weaker investment performance.

Siedle dug through GTCR’s SEC filings. He found that when pension funds signed deals with the firm, they were often also permitting GTCR to engage in a multitude of scenarios that could lead to conflicts of interest for the firm. Siedle writes:

The litany of permissible conflict of interest scenarios (many of which are commonplace throughout private equity) detailed in Bruce Rauner’s firm SEC filings, should be disturbing to any so-called sophisticated investor. Unfortunately, public pensions routinely consent to such potentially harmful conflicts  either because they don’t read, don’t fully comprehend the oblique disclosures, or simply don’t care that politically-connected insiders may be profiting at the expense of stakeholders. For example:

“The Adviser and certain employees and affiliates of the Adviser may invest in and alongside the Funds, either through the General Partners, as direct investors in the Funds or otherwise (emphasis added)…

The Adviser and its related entities may engage in a broad range of activities, including investment activities for their own account (emphasis added)…

The Adviser may, from time to time, establish certain investment vehicles through which employees of the Adviser and their family members, certain business associates, other “friends of the firm” (emphasis added) or other persons may invest alongside one or more of the Funds.

In certain cases, the Adviser may cause a Fund to purchase investments from another Fund, or it may cause a Fund to sell investments to another Fund.”

Translation from legal-speak: Rauner and his associates could invest directly, or create a special “family and friends” fund which could invest, at lower cost in shares of the same companies his firm purchased for funds in which public pensions invest. The associates, or “family and friends” fund, could profit by holding onto those shares, or immediately flip them, selling to the funds in which public pensions invest at a guaranteed, riskless mark-up.

Alternatively, GTCR could sell start-up companies it founded (or the family and friends fund could sell companies it purchased from GTCR) to funds the firm managed for public pensions at inflated prices.

“In addition, the Adviser may, from time to time, fund start-up expenses for a portfolio company and may subsequently sell such portfolio company to a Fund. Such transactions may create conflicts of interest because, by not exposing such buy and sell transactions to market forces, a Fund may not receive the best price otherwise possible, or the Adviser might have an incentive to improve the performance of one Fund by selling underperforming assets to another Fund in order, for example, to earn fees.”

Improve the performance of the friends and family fund by selling the laggards to other GTCR funds in which public pensions invest? Seems possible, based upon the firm’s SEC filings.

Read Siedle’s full column, which contains more analysis and insights, here.

San Francisco Pension Backs Off Hedge Funds After Conflicts of Interest Surface

Golden Gate Bridge

San Francisco Employees’ Retirement System (SFERS) was set to vote yesterday on whether the fund should allocate up to 15 percent of assets, or $3 billion, to hedge funds.

But the vote never happened, in part because of the objections of union members and retirees who showed up to the meeting. Recent reports of conflicts of interest surrounding the hedge fund investments probably didn’t help, either.

From the International Business Times:

San Francisco officials on Wednesday tabled a proposal to move up to 15 percent of the city’s $20 billion pension portfolio into hedge funds. The move came a day after International Business Times reported that the consultants advising the city on whether to invest in hedge funds currently operate a hedge fund based in the Cayman Islands.

The hedge fund proposal, spearheaded by the chief investment officer of the San Francisco Employees’ Retirement System, or SFERS, had been scheduled for action this week. If ultimately enacted, it could move up to $3 billion of retiree money from traditional stocks and bonds into hedge funds, potentially costing taxpayers $100 million a year in additional fees.

Pension beneficiaries who oppose the proposal spoke at Wednesday’s meeting of the SFERS board. They cited financial risks and the appearance of possible conflicts of interest in objecting to the hedge fund investments.

Prior to the meeting, the Service Employees International Union, which represents roughly 12,000 members who are eligible for SFERS benefits, asked city officials to have the hedge fund proposal evaluated by a consultant who has worked with boards that have opted against hedge funds.

David Sirota reported on the possible conflicts of interest earlier this week:

[SFERS is] drawing on the counsel of a company called Angeles Investment Advisors, one of a crop of consulting firms that has emerged across the country in recent years to aid municipalities in navigating the murky waters of managing money.

For two decades, Angeles has been employed by the San Francisco pension system to champion the best interests of city taxpayers and employees — the cops, firefighters and other municipal workers who depend on pension payments after their retirement. But the firm is concurrently playing another role that complicates its image as a disinterested guide: An International Business Times review of U.S. Securities and Exchange Commission documents has found that since 2010, Angeles has run a hedge fund based in the Cayman Islands that invests in other hedge funds.

In other words, the consultants that are supposed to be providing unbiased advice about whether San Francisco would be wise to entrust its money to the hedge fund industry are themselves hedge fund players.

SFERS says that, although the vote is tabled for now, it could be brought back at a later time.

This isn’t the first time the pension fund has delayed voting on hedge fund investments. In fact, it’s the third time: the board first delayed the vote in June. Then it delayed the vote again in August.