Kentucky pension faces placement agent audit

Following an internal audit this summer, Kentucky Retirement Systems is facing a review by Kentucky’s state auditor over its use of placement agents.

The Kentucky Retirement Systems is being reviewed by Kentucky state Auditor Crit Luallen for the $13 billion system’s use of placement agents and other aspects of the KRS operation, according to a pension fund spokesperson.

The state audit follows an internal audit by Kentucky Retirement Systems in July showing that Adam Tosh, the pension’s former chief investment officer, used Glen Sergeon as a placement agent.

The pension found that Sergeon, working with three different firms called Diamond Edge Capital Partners, Bleecker Street Partners and Cazanave, secured six investments worth $426 million for private equity managers from the pension and was paid nearly $6 million in fees. There is no suggestion Sergeon was used for KRS' real estate fund investments.

Sergeon and Tosh worked together on a global emerging markets strategy when Tosh was CIO at the Pennsylvania State Employees' Retirement System, according to the audit. It's not clear who Sergeon worked for at the time, but he formerly worked as director of public fund marketing for the US institutional effort of Merrill Lynch Mercury Asset Management.

“Due to this prior working relationship and the continuous use of Mr. Sergeon there could be a perceived appearance of preferential treatment,” according to the pension’s internal audit.

Tosh resigned as CIO in June to join investment consultant RogersCasey in Connecticut.

The audit found that managers seeking commitments from Kentucky had paid almost $13 million since 2004 to placement agents. The audit, which found no link to pay-to-play activities, accounts for dates ranging from 1 July 2004 to 30 September 2009.

As a result of the audit, the compliance officer recommended pension staff be required to publicly disclose all such connections with placement agents going forward – a step beyond the policy the pension program put in place last year requiring disclosure of placement agent names and fees paid.

Kentucky has a 14.3 percent allocation to alternative investments and real estate, against a target allocation of 12 percent. The pension does not break out its real estate allocations, although lists commitments to several real estate funds and deals, including Mesa West Real Estate Income II fund and Walton Street Real Estate Fund VI.