CalPERS wants placement agents to earn flat fees

The Board of the California Public Employees’ Retirement System (CalPERS) voted yesterday to sponsor state legislation to treat placement agents who solicit public pension funds as lobbyists, which would lead to a ban on success fees.

The legislation would require placement agents to register as lobbyists in accordance with the Political Reform Act, and prohibit them from receiving compensation that is contingent upon the outcome of any investment activity. Agents and their firms would also be subject to periodic registration as well as quarterly reporting of activities, while gifts to individuals would be limited and campaign contributions would be prohibited.

The law would also require agents to attend an ethics classs every two years. 

The move comes after CalPERS created its own placement agent disclosure policy in May – amid the ongoing pay-to-play investigation in New York – and initiated a “special review” in October of fees paid by investment firms to placement agents in connection with investments from the pension. The review came about due to revelations that placement agent Alfred Villalobos was paid more than $70 million by investment firms over a five-year period for his work in securing investments from CalPERS.

“We need strong measures to make sure that placement agents who contact pension fund officials are subject to appropriate oversight,” Rob Feckner, board president for CalPERS, said in a statement yesterday. “Reporting and ethics rules for lobbyists who try to influence public policymakers will work effectively as well for placement agents.”

However, the proposed lobbying rules will be met with groans by members of the placement community and the general partners who rely on them for fundraising services. Referring to the many legislative and regulatory reactions to the pay-to-play scandal that began in New York, one US placement agent said: “I think it’s unfortunate that a few bad apples are hurting what is a very important service that makes the private equity market more efficient. I’m hoping that this [proposed rule] will not take root in any more states than necessary.”

The agent also claimed that in creating a disincentive for placement agents to market to California public pensions, the lobbying rule would create an “adverse selection” problem for these investors. “There are over 500 significant [limited partner] investors in the market,” the agent said. He added that if, for example, CalPERS and the California State Teachers Retirement System were removed from the standard placement agent marketing route, “they’re not going to stop funds from getting raised. Even if we lose 10 important states, in terms of trying to raise capital, the losers will be those states that opt out.”

Meanwhile, a managing partner for a boutique fund placement agent said the rule could pose problems regarding payment for work already done by an agent. “[CalPERS] basically says you cannot pay someone unless they are a lobbyist, and then the first regulatory bullet was that you cannot pay someone a success fee,” he said. 

The partner added that the rule for placement agents would be hard to square with the sale of other forms of securities to public pensions. “That’s kind of problematic because then you are getting into the definition of securities,” he said. “So they are saying you can’t pay someone for showing them a small piece of what the definition of securities is. Technically I guess Credit Suisse couldn’t sell CalPERS an IPO unless they were a lobbyist.”

California state controller John Chiang today said the CalPERS-supported legislation would provide more accountability and transparency. But a partner at a New York-based growth equity firm recently questioned whether that would really be the case. Commenting on the possibility of requiring agents to become lobbyists, which at the time was still under consideration by CalPERS, he noted that despite the higher regulatory standards two which they are held, lobbyists have had their share of scandals involving gifts, cash contributions and other forms of influence peddling.