When you have a pair of shoes that give you blisters would you go out and buy a new pair or would you stop wearing shoes altogether? Most rational people would, of course, buy a new pair of shoes, and preferably ones that were slightly more comfortable. Few would opt to go barefoot in protest.
But that's exactly what New York State Common Retirement Fund has done after banning the use of placement agents, paid intermediaries and registered lobbyists in the wake of the kick-back scandal that is currently engulfing the public pension.
Ever since the Securities and Exchange Commission in March charged former New York Common pension chief investment officer David Loglisci with allegedly running a scheme to direct sham “finder's fees” from private equity firms looking for commitments, the pension has sought to retake the moral high ground. And rightly so.
However, the decision by the pension's comptroller, Thomas DiNapoli, on 22 April for a wholesale cull of placement agents from New York Common's investment process is not just a massive political overreaction, but a policy fraught with problems for the pension itself – and others that might consider following in its footsteps.
Few people ever like paying money to an intermediary, however in the private equity real estate world – and that of other asset classes – placement agents do provide a necessary service. Although not all funds use placement agents, most choose to in order to better focus their energies on what's important: making money on behalf of their investors.
From the perspective of limited partners, legitimate placement agents can also prove a useful means of sifting the wheat from the chaff of wannabe fund managers. As one senior pension plan manager said, in doing their own due diligence good placement agents have selected managers that can demonstrate solid, credible strategies for producing the best returns. Real placement agents make money by securing LP commitments for their GP clients. They themselves don't want to back losers.
This due diligence can help limited partners as they consider the vast array of fund managers knocking at their door. What pension fund after all has an army of staff on hand to go chasing the next emerging private equity real estate fund manager? It is unclear exactly how far New York Common's “ban” will prevent work done by placement agents from reaching the investment staff of the pension. According to a detailed set of policies and procedures released by DiNapoli's office last month, fund managers must represent that they “did not use the services of a placement agent … in obtaining investments by the Fund”. Does this mean the GP can't show DiNapoli's staff a flip book that a placement agent put together? If a placement agent did due diligence on a fund, is this thrown out the window, leaving DiNapoli's staff to do the work themselves?
Of course, as with every industry and every walk of life, there will be bad apples. There is nothing anybody can to do to avoid this fact of life. But in banning placement agents across the board – and for every asset class, not just alternatives – DiNapoli has made a fundamental admission. That New York Common is unable to police its own staff adequately enough.
As news of the scandal has emerged, more attention has been paid to Henry Morris, the former political advisor to ex-New York State Comptroller Alan Hevesi and the man jointly charged with Loglisci in running the alleged fraud scheme at the Common Retirement fund. As the “finder” in the scandal, Morris allegedly made $15 million in kick-backs. Less attention has gone to Loglisci, the CIO of New York Common, who was instrumental in ensuring the fraudulent scheme succeeded for three years.
The industry though understands the political nature of the current debate. Few people PERE spoke with believe it will have lasting ramifications for placement agents themselves, with but a handful of pensions opting to ban intermediaries in the future.
What many do believe though is that it could seriously hamstring the ability of pension funds to gain clear information on the market, and to communicate with the managers who would manage hundreds of millions of pension dollars.
It is also unclear how larger mega-funds, with in-house fundraising operations, will be affected by the ban, or bans. John Kukral's Northwood Investors, which used Park Hill as its placement agent, is being talked about as one fund with the ability to make once-in-a-generation returns in the current crisis. With no legacy issues whatsoever and more than $1 billion in dry powder, Kukral has plenty of opportunities to play with. So too do plenty of other fund managers currently out in market raising capital. Will they now think twice before contacting New York Common?
By banning placement agents, New York is only hurting itself. Perhaps it's time they put on a new pair of shoes.