The impact of a still-unwinding pay-to-play scandal that originated out of the $109 billion New York State Common Retirement Fund has reverberated through private equity communities around the world. As many limited partners struggle to tell the difference between true placement agents and sham finders, two “codes of conduct” for that business have emerged, one in the US and one in Europe.
The European Private Equity and Venture Capital Association (EVCA) has launched a draft code of conduct for private equity placement agents, which is due to be fully adopted later this year. To devise the code, the association assembled a task force chaired by placement firm MVision’s Mounir Guen and comprising eight professionals from the industry. The code’s development involved extensive consultation with US gatekeepers, US public pension funds and a wide range of EVCA members from the LP and GP communities, according to EVCA’s statement.
The EVCA code has the backing of the Institutional Limited Partners Association (ILPA), a body that represents 220 member organisations with around $1 trillion in private equity under management. Joncarlo Mark, chairman of ILPA, and a portfolio manager at teh California Public Employees’ Retirement System (CalPERS), described the code as “a positive step towards improving transparency in the industry”.
Meanwhile in the US, a number of firms, including The Carlyle Group, Riverside and Pacific Corporate Group, have now signed up to a code of conduct created by New York’s Attorney General Andrew Cuomo. The three aforementioned firms have also paid a combined total of $52 million in settlement fees.
So how do the codes compare? While the EVCA code is intended for adoption by placement agents, Cuomo’s code is for public pension plans and investment firms to adopt. Cuomo’s code actually bans the use of placement agents for contacting New York public pension funds altogether – unsurprisingly, the man who has compared placement agents to historic American icon of political corruption Boss Tweed seems to feel they have no place whatsoever in the private equity industry.
The codes also reflect their makers: the code from the EVCA, a voluntary trade association, focuses more on describing appropriate, professional activity to which placement agents should aspire; while the code from Cuomo, a representative of the government, focuses on defining and banning inappropriate activity.
Authorisation of placement agents
EVCA: “Where local laws require it, a [placement agency] must be registered and/or authorised with, and regulated by, as applicable, appropriate regulatory bodies in each jurisdiction in which it undertakes regulated activities … A firm’s representatives should possess the licenses or certifications required by legal, governmental, regulatory or self-regulatory organizations to which the placement agent or its representatives are subject, including, as required, the more stringent certifications for those acting in a supervisory capacity.”
CUOMO: “Investment firms are prohibited from using placement agents, lobbyists, or any other third-party intermediary to communicate or interact with public pension funds for any purpose.”
Standard of conduct
EVCA: “A [placement agent] should perform reasonable due diligence in respect of a client commensurate with the scope of its engagement … maintain professional relationships with a meaningful number of investors which seek to invest in private equity, and typically should be retained to raise capital from all or a significant subset of such investors … enter into a written contract with a client specifying the scope of services the firm will perform and the fee arrangement, and confirming the firm will adopt and adhere to the code… A firm should not make or offer to make any payment or other consideration with a view to inducing a third party to enter into negotiations with a client.”
CUOMO: “Holds investment firms to a higher, standard of conduct that avoids even the appearance of impropriety. The Code prohibits (1) improper relationships between pension fund officials and an investment firm’s personnel or agents, (2) “revolving door” employment by investment firms of former public pension fund officials and employees, and (3) improper gifts by investment firms to public pension fund employees and officials.”
Transparency
EVCA: “A [placement agent] should disclose, upon the request of a prospective or existing investor, the fee arrangement the firm has agreed to with a prospective or existing client or its manager in respect of such investor’s investment in such clients or its funds … Any sub-placement agent retained by the firm must be disclosed to a prospective or existing client and its investors … A firm should keep records of the performance of its duties for a minimum period of five years available for inspection by the relevant client.”
CUOMO: “Requires rigorous, ongoing disclosure of information relating to campaign contributions, the identities, responsibilities and qualifications of investment fund personnel and any payments by investment firms to third-parties in connection with public pension fund matters. Also requires investment firms to promptly publish such information on their websites … Investment firms are required to promptly disclose and cure any actual, potential and apparent conflicts of interest to public pension fund officials or law enforcement authorities where appropriate.”
Avoiding pay-to-play
EVCA: “Any political donation made by any placement agent firm, any affiliate or representative of the firm or any employee (or immediate family member of employee) shall be disclosed to prospective and existing clients, to prospective and existing investors of such clients, to regulatory bodies and to decision-making bodies connected to that recipient firm or individual upon request … Any firm engaging any former employee of a government pension plan or any one in the decision-making chain of command regarding an investment by such government pension plan in a private investment fund must make full disclosure of such engagement to its prospective and existing clients and clients investors and such person must agree not to solicit such government pension plan for at least three (3) years.”
CUOMO: “Prohibits investment firms (and their principals, agents, employees and family members) from doing business with a public pension fund for two years after the firm makes a campaign contribution to any elected or appointed official who can influence a public pension fund’s investment decisions. The prohibition also applies to candidates for such positions, but does not apply to contributions of $300.00 or less to elected officials or candidates for whom the person making the contribution can vote.”
Penalties
EVCA: “Compliance is a prerequisite to membership of the EVCA by any member firm engaging in placement agent activity. The sanction for non-adoption or for proven breach of the code or proven misconduct by a member is expulsion of that member from EVCA.”
CUOMO: “Investment firms must certify annually to the Office of the Attorney General (and any public pension fund that asks) that they are in compliance with the code of conduct. Violations of the code constitute grounds for either termination of an existing investment, disqualification from doing further business with the public pension fund for up to ten years, or both.
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