Luxury travel, limited acceptance

Limited partners’ inboxes began buzzing in early May with news that Leon Shahinian, who has run the alternative investment programme at the California Public Employees’ Retirement System since 2004, had been placed on administrative leave because of his alleged relationship with a placement agent who is being sued by the California Attorney General’s office.

Shahinian, who joined CalPERS in 1998, has not been accused of wrongdoing by the attorney general, which is suing Alfred Villalobos, a former CalPERS board member who runs placement firm ARVCO, for alleged fraudulent activities relating to his work soliciting commitments from CalPERS for clients including Apollo Global Management. Villalobos has denied the allegations.

The AG’s complaint, which alleges that Shahinian failed to disclose a lavish trip paid for by Villalobos, describes a fiduciary caught in the middle of a corrupt old-boy network. Shahinian was “instructed to build a closer relationship with Villalobos” by then-CalPERS chief executive Federico Buenrostro, a close friend of Villalobos who has also been named in the suit. At the time, Villalobos’ firm, ARVCO, was working for Apollo, placing funds with CalPERS and trying to convince the pension to buy a stake in the firm.

In May 2007 Shahinian accepted a trip to New York with Villalobos that involved private jet travel, a two-room suite at the Mandarin Oriental, and a gala at the Museum of Modern Art (MOMA) in honour of Apollo Global Management founder Leon Black. At the event, Shahinian met Black and Black’s wife.

The trip was funded by Villalobos and/or his company ARVCO, who was eventually reimbursed for the trip, for at least $63,000, by Apollo. Shortly after Shahinian returned to Sacramento, he received three bottles of champagne from Villalobos, including one bottle valued at $200, the complaint said. Two weeks after the trip, the complaint alleges Villalobos faxed Shahinian the term sheet for a proposed $700 million investment in Apollo.

One month after the trip, Shahinian made a presentation before the CalPERS investment committee to recommend the $700 million investment in Apollo, but “did not disclose to the CalPERS’ Board that he had just returned from an all-expenses paid trip with Villalobos to New York to attend the MOMA Event”, according to the complaint. CalPERS would eventually pay $601 million for a 10 percent stake in the firm, the complaint said. ARVCO collected a $13.2 million fee for its placement work.

The notion that a few bottles of champagne and a ritzy trip would convince an LP to make such recommendations is probably far-fetched, says one influential US limited partner.  “It’s perception versus reality,” the LP said, noting that such tales of extravagance can be hard for nearly all other types of government workers to comprehend. “This is the irony in this industry. We are civil servants, very well paid civil servants, and you deal with people that want you to feel like their best friend … they want you on a first name basis, to see their house, their art collection. It is insane. That’s the business.”

One has to be very strong not to succumb to invitations from GPs, the source said, noting that LPs receive offers for trips and to exclusive events all the time. “I’m surprised because I like Leon, he’s a very good man … but taking a private jet to New York?”

Others who know Shahinian describe him as dedicated to his work at the pension but reserved. “I always felt Leon was honest,” said one source who has interacted extensively with CalPERS. “[He was] very shy, very much ‘Mr. Inside’ trying to coordinate things between staff and board, not what I would consider to be a PE expert but a politician, needed in a political organisation.”
Shahinian could not be reached for comment.

Shahinian’s career at CalPERS started in 1998, when he was hired from Foundation Health Systems, where he worked as a fixed-income portfolio manager. Shahinian originally looked at the open position at CalPERS because he always wanted to be an investment banker. He worked under the pension’s former alternatives boss, Rick Hayes, for a few years as Hayes was growing the pension’s private equity programme into one of the biggest backers of private equity funds in the world.

Shahinian told PEI in 2004 that he wanted to travel more. While working under Hayes, Shahinian frequently held down the fort while Hayes travelled to meet GPs off-site. But he described travel as an employee of CalPERS to be difficult, because every trip had to be documented and justified to the board.

Another source who knows Shahinian said his decision to take the trip with Villalobos and not disclose it was a product of a weak system of governance at the pension rather than an indictment of the man’s character.

That system is now being systemically examined by the pension’s leadership, which has bolstered its disclosure requirements for placement agent fees, and introduced legislation for the state to treat placement agents as lobbyists, forcing them to report gifts and banning success-based “contingency” compensation.

If Shahinian is removed from the pension, it would be a sad career diversion for an “honest guy”, say sources, who generally had positive things to say about him.

A former colleague quoted by PEI in 2004 described him as “devoid of ego” and “a very hard worker who doesn’t get excited or emotional about things”.