By Gillian Wee
May 11 (Bloomberg) -- Middlemen who lobby public pensions for private-equity and hedge funds are fighting efforts to ban placement agents by arguing that the scandal engulfing their business will cull influence peddlers.
“What’s going on in the short term is important and something we have to respond to,” said Joseph Herman, a senior management principal for Park Hill Group, which provides such services as a unit of Blackstone Group LP, the world’s biggest private-equity company. “It’s going to clean out people who aren’t qualified and the cause of the problem.”
Herman said he is part of a coalition that’s advocating the value of placement agents to state treasurers. New York Attorney General Andrew Cuomo said he is probing influence peddling, kickbacks and unregistered brokers in the industry and has issued more than 100 subpoenas. The U.S. Securities and Exchange Commission also is investigating.
“Groups like Park Hill are going to be in a great position” once industry practices are improved because the firms will be poised to gain a bigger share of the business, Herman said in an interview. He spoke last week while attending a New York conference for private-equity firms on raising capital during the worst recession since the Great Depression.
The pool of pension assets available for middlemen to chase is shrinking. Public and private retirement-fund assets totaled $10.4 trillion at the end of 2006, according to the latest annual report on institutional-investor assets by the Conference Board, a New York research group.
Shrinking Assets
The Standard & Poor’s 500 Index of U.S. stocks has since fallen 36 percent. Census Bureau data published April 30 show that state and local public pension assets fell to $2.23 trillion at the end of 2008, a 24 percent decline from 2007 and the lowest since the third quarter of 2004.
Some pensions are moving to restrict middlemen. New York state and city have banned the use of paid intermediaries by money managers seeking slices of their pension funds, with assets of $122 billion and more than $30 billion, respectively. New Mexico Governor Bill Richardson has ordered his state’s investment council to do likewise.
North Carolina’s state pension is preparing rules for placement agents to prevent abuses.
“We’re in the process of developing a formal policy, given all the activity,” state Treasurer Janet Cowell, who oversees $60 billion in pension investments, said in a May 8 interview. “It’s been our informal practice that placement agents must be disclosed, and we’re trying to formalize that.”
Disclosing Middlemen
The California Public Employees’ Retirement System, the largest U.S. public pension, also is moving to require investment firms to disclose payments to middlemen.
“Those who are called placement agents today in a year are going to be divided into three groups: legitimate investment bankers, lobbyists and bad guys,” Steve Robling, managing director of New York-based placement agency Liati Group LLC, said in an interview. “A good placement agent, like a good investment banker, knows what someone would invest in and tries to identify the highest quality product in the asset class for that person.”
Scrutiny of the industry intensified March 19, when Cuomo and the SEC filed criminal and civil complaints against Henry “Hank” Morris, former New York Comptroller Alan Hevesi’s political adviser, and Deputy Comptroller David Loglisci.
‘Victimized States’
Hevesi hasn’t been charged in the case; the other two were accused of extracting kickbacks from private-equity firms and hedge funds in exchange for contracts to manage money from the New York State Common Retirement Fund. Cuomo called them part of “a national network” that “victimized states and taxpayers all across the country.”
William Schwartz, a lawyer for Morris, didn’t return a call; he previously has said his client is innocent. Irving Seidman, a lawyer for Loglisci, said his client “at all times conducted himself in a legal and proper manner.”
In addition to those charges, the probe has resulted in a guilty plea from one money manager and the indictment of another whose firm also was banned or suspended from doing business for four public pension plans. Two Los Angeles Department of Fire and Police Pensions commissioners, including the president, quit their posts May 7 after the SEC questioned them about ties to firms that are under scrutiny in the New York case and do business in California.
Pension-fund overseers in Florida and Massachusetts have defended placement agents as providers of valuable services, including marketing and investor relations.
‘A Legitimate Place’
“I’m amazed that a political corruption case has led people to question the legitimacy of a long-established part of the asset management business,” said Michael Travaglini, executive director of the $34.2 billion retirement fund for public employees in Massachusetts. “There’s a legitimate place for placement agents.”
“Just because you have bank fraud doesn’t mean all banks are crooked; it’s the same with placement agents,” said Ash Williams, who helps oversee $113 billion in pension funds and other investments as executive director of Florida’s State Board of Administration. “There’s been criminality in pay-for-play, but that doesn’t mean all placement agents are bad.”
Blackstone Chairman Stephen Schwarzman also defended the industry’s middlemen during a May 6 conference call with investors on his company’s quarterly earnings. The New York- based corporation’s Park Hill unit has raised $104.2 billion for 65 funds since its creation in 2005. Schwarzman called for “extensive” new rules rather than outright bans.
Cuomo’s inquiry “has placed the whole placement agent business under attack,” he said. “Legitimate placement agents, such as Park Hill at Blackstone, could not be more different from the political fixers and influence peddlers that are the subject of the New York investigation.”
“Small-size funds, women-controlled funds, minority-owned funds and startup funds need an advocate and a representative to get them noticed,” Schwarzman added. “Banning placements entirely disproportionately hurts all of them.”
To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net;
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