Friday, May 15, 2009

Placement Agents Likely to ‘Go Away,’ Illinois’ Atwood Says

Placement agent firms probably will disappear following New York Attorney General Andrew Cuomo’s probe of pension fund influence-peddling, a top Illinois investment official said.

“The whole placement agent space is under a lot of pressure,” said Bill Atwood, executive director of the Illinois State Board of Investments, which oversees $9.5 billion of assets in public-employee pensions. “It’s likely it’s just going to go away” because such intermediaries already have been barred in his state and New York, “a big part of the market,” Atwood added.

Placement agents pitch investments to pension funds and other institutions on behalf of hedge and private-equity funds. Cuomo and the U.S. Securities and Exchange Commission say they’re investigating money managers and agents who used ties to public officials and kickbacks to buy and sell access to the $2 trillion in U.S. public-pension systems.

The Illinois Teachers’ Retirement System barred money managers from paying finders’ fees to middlemen in 2005 after Carlyle Group, a Washington private-equity firm, paid $5 million in fees to Robert Kjellander, a lobbyist. Illinois this year barred investment firms from paying placement agents to get investments from its public pensions.

‘No laws broken’

“There were no laws broken,” Atwood said of Carlyle hiring an intermediary to win state investment business. The episode “cast a negative light on the more legitimate types of marketing services” placement agents provide, he added. “From the perspective of legislators, they felt like they had to take action on that. Their response was to outlaw the entire practice.”

Cuomo announced yesterday that Carlyle Group had agreed to end an investigation of the Washington firm’s dealings with New York’s pension fund by adopting his “code of reform” for money managers, which bars the use of intermediaries and restricts campaign donations to officials who oversee state money.

Carlyle, the first investment firm to sign on to Cuomo’s guidelines, is the second-biggest private equity firm after New York-based Blackstone Group LP. It manages about $85.5 billion in assets.

Scrutiny of the industry intensified on March 19, when Cuomo and the SEC filed criminal and civil actions against Hank Morris, a former top political adviser to New York State Comptroller Alan Hevesi, and Hevesi’s ex-deputy, David Loglisci. They were accused of extracting kickbacks from private-equity firms and hedge funds for contracts to manage money from the New York State Common Retirement Fund. The defendants have denied wrongdoing.

$20 million

Cuomo said New York invested about $730 million in Carlyle- related funds after the firm retained Morris, who shared in $13 million in finder fees. Carlyle Group employees donated at least $118,000 to Hevesi, according to New York campaign-finance records. As part of the settlement, Carlyle also agreed to pay $20 million.

“There’s always a question about placement agents,” Atwood said. “Are they a legitimate business where you outsource marketing?” he added. “Or are you using that payment schedule to basically purchase relationships?”

Arthur Levitt, a former SEC chairman and adviser to Carlyle, is a member of the Bloomberg LP board of directors. Bloomberg is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.

New York state and city officials and New Mexico Governor Bill Richardson responded to Cuomo’s inquiry by barring placement agents. The California Public Employees’ Retirement System, the largest U.S. public pension, approved new disclosure rules.

Pension-fund overseers in Florida and Massachusetts have defended placement agents as providers of valuable services, including marketing and investor relations.


“I’m amazed that a political corruption case has led people to question the legitimacy of a long-established part of the asset-management business,” said Michael Travaglini, executive director of the $34.2 billion retirement fund for public employees in Massachusetts.

Blackstone Chairman Stephen Schwarzman defended the industry’s middlemen during a May 6 earnings conference call with shareholders. The New York company’s placement agent unit, Park Hill, has raised $104.2 billion for 65 funds since its creation in 2005. Schwarzman called for “extensive” new rules rather than outright bans.

The Third Party Marketers Association, or 3PM, says banning agents will hurt smaller money managers who lack marketing resources and make it difficult for pension funds to find investment professionals with the expertise they seek. The Princeton Junction, New Jersey, group represents more than 75 placement agencies and intermediaries.

Cuomo’s reform code is “a political cop-out,” said Donna DiMaria, the group’s president.

“It’s a way for Cuomo to show he’s doing something,” she said. “This is something he is asking investment managers to sign, which goes to show the limited power he has in making rules for the pension plans” nationwide.