The private equity industry has reacted with scepticism over a plan by the California Public Employees' Retirement System to create an online service for managers to electronically submit investment proposals.
The $198 billion pension plans on launching the system in July in an effort to halt the use of placement agents.
“We’re working hard to make sure that money managers have all the access they need to do business with us. There’s no need for them to pay someone to call us or to set up a meeting. They can contact us themselves with the tools and technology we have. Our door is open,” said CalPERS chief investment officer Joseph Dear, in a statement.
One market source who advises private equity GP and LP clients described the plan as “BS”.
“In PE alone [CalPERS] probably gets 600 to 700 PPMs a year, which very often disappear into the system as the staff at CalPERS triages these, oversees the due diligence process on things they are actually reviewing, and monitors the hundreds of partnerships already in the portfolio,” the source said. “This isn't new, this is repackaging – unless they are going to hire more people to vet these and answer all GPs in detail.”
There’s no need for them to pay someone to call us or to set up a meeting. They can contact us themselves with the tools and technology we have. Our door is open.
In submitting an investment proposal, managers will be asked to select the asset class that fits their proposal. The manager also would have to provide information about its history, track record, strategy, deal sourcing and geographic and industry focus.
After the investment office reviews the proposal, it may be declined, accepted for additional due diligence or referred to one of the pension’s external partners for further review.
Another source who has worked with CalPERS questioned whether the automated system would prevent pay-to-play situations.
A placement agent's job is not about “greasing someone's palm to consider something”, the first source said. It's about “knowing on an updated basis what an institutional investor is really interested in. Are they looking heavily at cleantech, and if so what are the parameters? Oh, they were interested in life science, but just made a big commitment to that sector and are probably tapped out for the year. Oh, and the guy on staff who is really interseted in mezzanine and is driving that process is … None of that is going to show up online,” the source said.
Separately, the California State Assembly is expected to vote Friday on AB 1743, a bill that would require placement agents to register as lobbyists.
CalPERS co-sponsored the bill that would expose placement agents to stricter disclosure requirements, and end payments for successful fundraisings. Placement agents under the proposed bill would instead be paid flat fees up front, as are lobbyists.
Agents and their firms also would be subject to periodic registration as well as quarterly reporting of activities. Also, gifts to individuals would be limited and campaign contributions would be prohibited.
CalPERS sponsored the legislation in the wake of allegations that a former member of the pension’s board had been paid millions of dollars in fees to solicit commitments from the pension for Apollo Management and other firms. It is not clear why Apollo needed the assistance of the placement agent, Alfred Villalobos, despite being partially owned by CalPERS.
Christopher Witkowsky contributed to this report.