US pension guarantor cancels PE, RE contracts amid investigation

The Pension Benefit Guarantee Corporation (PBGC) has revoked lucrative private equity and real estate advisory contracts with BlackRock, Goldman Sachs and JPMorgan after concluding that the former head of the federal corporation may have acted inappropriately before and during the bidding process.

The Pension Benefit Guarantee Corporation (PBGC) has cancelled consulting contracts worth some $2.5 billion with three firms after concluding that a former director may have acted inappropriately during the bidding process.

A spokesperson for Washington DC-based PBGC today confirmed that on July 20, contracts with BlackRock, Goldman Sachs and JPMorgan were revoked. The spokesperson confirmed that the contracts in question were related to the federal corporation’s private equity and real estate programme.

The three firms were selected at the end of last year to oversee PBGC’s foray into the private equity and real estate asset classes.

The $48 billion PBGC guarantees the defined-benefit pensions of private employers in the US. As the recession has unfolded it has taken over the management of pensions of bankrupt corporations, some of which include alternative investments.

A New York Times article yesterday cited emails between the former PBGC director, Charles Millard, and executives at BlackRock, Goldman Sachs and JPMorgan as among items that led corporation officials to decide the bidding process may have been tainted.

The director of the PBGC is appointed by the US president. When Millard joined the corporation in June 2007, according to the Times article, he sent an email to a senior Goldman official saying that he planned to change the portfolio strategy, and asked whether the Goldman “would be interested in pursuing this business”. The official wrote back: “Yes, absolutely!”

A request-for-proposal (RFP) document was issued in July 2008 detailing the PBGC’s desire to set up one or more “strategic partnerships” with a firm or firms that could help it build out private equity and real estate allocations.

The Times article reports that 16 bids were submitted. However, a person familiar with that process points out an unusual requirement in the RFP, at least when viewed in the context of the alternative investment advisory market. Among 13 requirements for bidders was one mandating that the proposing firm have “thousands” of employees. The section requires that a bidder “demonstrates significant global presence through well-staffed offices around the world and a large number of employees numbering in the thousands”.

Even the largest private equity and real estate advisory firms in the world have hundreds, not thousands, of employees, unless they are housed within larger financial institutions, and the employees of the other divisions are counted toward the “thousands” requirement.

“Thus the field was immediately limited to in-house groups of the large [investment banks],” the source said.

An audit of the corporation found Millard had exchanged ideas with a JPMorgan executive about what kinds of questions to put in the RFP several days before the release of the RFP.

The PBGC spokesperson did not respond to a question about the “thousands” staffing requirement.
The Times report concludes that the thousands of internal PBGC documents related to Millard’s bidding process show evidence that the process “at least violated the spirit of the law” governing federal contracts. It reported the matter has “drawn the scrutiny” of Congressional investigators.

In the report, representatives of BlackRock, Goldman, and Millard said they had done nothing wrong. Millard “correctly separated his personal relationships from his official actions”, a spokesperson for Millard told the Times.

The controversy first came to light in May, when a whistleblower alleged that Millard had acted improperly in hiring the services of the three firms.

At the time, the audit concluded that Millard “communicat[ed] directly with some bidders at the same time that he was actively evaluating their strategic partnership proposals, a clear violation of the prohibition of contact with potential offerors”.

The audit found no “criminal activity” on the parts of the bidders.

–Christopher Witkowsky contributed to this article