You know the placement business is in trouble when the attorney general of New York State holds a special press conference to talk about it.
On 30 April, attorney general Andrew Cuomo announced a major development in his broadening investigation into the public pension market – the arrest of Saul Meyer, the founder of Dallas-based private equity investment advisor Aldus Equity Partners. Meyer has been charged with paying what he knew to be sham fees to Henry Morris, a well known New York Democratic party operative, in exchange for business with the New York State Common Retirement Fund.
Morris has also been arrested, as has David Loglisci, the former chief investment officer of New York Common, who allegedly insisted to some private equity and real estate fund managers that they pay hidden fees to Morris and another associate, Barrett Wissman, or they could forget about doing business with the state pension.
The investigation remains ongoing – more than 100 subpoenas have been served by Cuomo's office to agents and the fund managers who paid them all over the US. Last month, The Carlyle Group paid $20 million to New York and adopted a code of conduct governing their use of placement agents in a bid to “resolve” its role in the pay-to-play scandal. Attorney generals in other states are also cooperating. Cuomo says he is targeting a national network of actors who have corrupted the process by which public retirement capital is invested.
Unfortunately, Morris and other one-man placement outfits around the country have thrived because some general partners and legitimate placement agents have been willing to pay them.
What has come to light are a collection of obscure front companies used by politically connected entrepreneurs to collect fees for making introductions to, and winning capital from, the right pension officials. It's the kind of thing that makes legitimate placement agents cringe.
Unfortunately, Morris and other one-man placement outfits around the country have thrived because some general partners and legitimate placement agents have been willing to pay them. A recent disclosure from the current comptroller of New York State, an elected official who solely oversees the New York State Common fund, shows a number of unusual little placement shops, run by Morris, Wissman and others, earning fees from the placement of state funds.
But it also shows many other funds winning state capital using no placement agent, or only using nationally recognised franchises like Credit Suisse and Merrill Lynch. It proves that the questionable middlemen at the centre of the scandal only got paid when the GPs involved cynically assumed that was the only way to play.
The shockwaves from the scandal have only just begun. Already two New York public pensions – the New York State Common fund and the New York City entity that oversees several pensions – have called for bans on contact between pension staff and placement agents. It is unclear what this will mean for the business of raising capital. However if the ban goes nationwide, it would cut off a major type of investor from placement agents and therefore represent a drop in revenue potential.
On the disclosed list are several prominent real estate firms, although none have been accused of wrongdoing.
One thing is for sure – one-man placement shops run by former political consultants are going to become untouchables in the new fundraising market.
As the reform campaign in many states continues, a number of questions still must be sorted out: if a manager uses a broker-dealer within an institution, such as an investment bank, that is paid a contingency fee, is that prohibited? Do due diligence and other materials that agents provide get caught up in these state prohibitions? Can an agent be paid on a flat fee rather than based on the capital they raise? Will a manager be penalised for using an agent in the past but not in relation to a pension they are pursuing currently?
For their part, placement agents from competing firms are informally brainstorming about how best to promote a clean image of their business to the public, to regulators and to pension officials. One thing is for sure – one-man placement shops run by former political consultants are going to become untouchables in the new fundraising market.