Placement agents play a vital role in the fund raising efforts of private equity real estate firms, and banning them will not fix the system, according to the executive director of the $38 billion Massachusetts state pension system.
“Legitimate placement agents are a long established part of the asset management industry,” said Mike Travaglini, executive director of Massachusetts Pension Reserves Investment Management Board. “Banning placement agents, to me, achieves nothing.”
Travaglini talked to PERE's sister website, PEO, about the recent efforts of some US public pensions to ban the use of placement agents by private equity firms looking for commitments. The bans come in the wake of a pay-to-play scandal that originated out of the $109 billion New York State Common Retirement Fund, in which the pension’s former chief investment officer and a former state political operative collected sham finder’s fee from investment firms looking for commitments.
Massachusetts uses placement agents to help identify investment opportunities and perform some level of due diligence the pension can’t do because of a lack of staff.
“I’ve got a very small staff and we’re trying to identify the available universe of opportunities, so to the extent that legitimate placement agents can source an investment opportunity for us, that my staff otherwise wouldn’t have found, then they obviously serve a legitimate purpose,” Travaglini said.
Massachusetts has a 10.9 percent allocation to real estate, with around 80 percent of the portfolio direct investments managed by managers such as LaSalle Investment Managers, RREEF, TA Associates Realty and Invesco Realty Advisors.
The pension has several layers of checks and balances that would make it hard for a situation like New York Common to occur, Travaglini said. Each potential private equity and real estate investment gets reviewed by the pension’s staff, the placement agent working with the pension, the pension board’s investment committee and the full board before it even goes up for a vote.
Massachusetts PRIM also has an annual audit by KPMG that reviews the selection process for every investment manager the pension uses in all asset classes, Travaglini said.
“It would be impossible for firms to receive funding from PRIM because of bribes or cash payments given the multiple layers of due diligence that exist,” Travaglini said. “If, as a fund, you’ve already put in place a best practices approach, banning placement agents doesn’t add any value.”
Political contributions by investment firms looking for business with pensions is a “legitimate area of focus” for a potential ban, he said.
Several US public pensions have banned the use of placement agents by investment firms looking for commitments. New York Common and the New York City pension system, New Mexico’s pensions and endowment and Illinois pensions have banned placement agents from participating in the investment process.
Other public pensions like the Los Angeles City Employees’ Retirement Committee and the California Public Employees’ Retirement System have crafted or are in the process of drafting more stringent disclosure policies for investment firms using third-party marketers.
The kick-back scandal involved a former New York political operative, Henry Morris, working with the New York state pension’s former chief investment officer, David Loglisci, to collect sham finder’s fees from investment firms looking for commitments from the pension.
New York attorney general Andrew Cuomo has indicted Loglisci and Morris, along with several other alleged players in the scheme, including Saul Meyer, founder of financial advisor Aldus Equity.
Cuomo alleges Loglisci would strong-arm private equity firms into cutting him and Morris in on a portion of fees. Numerous firms were caught up in the scandal, though none have been charged with wrongdoing.
The Carlyle Group, one of the firms mentioned in Cuomo’s complaint, was not charged with wrongdoing, but agreed to pay $20 million to New York and adopt a “code of conduct” governing placement of funds to “resolve its role” in the scandal.