Bloomberg’s Neil Weinberg peels back yet another layer of the soft corruption that pervades private equity dealings with modestly-paid public pension fund officials in a new article, Tuscany for $200? Private Equity Pays for State Pension Funds’ Luxury Trips.
We’ve repeatedly mentioned the universal practice of limited parters like CalPERS and CalSTRS sending private equity staffers to meetings hosted by the general partner at glamorous destinations with lavish wine and food and often, top tier entertainment (as in Elton John/Rolling Stones level). The excuse for these meeting is for the limited parters to get briefed. The reality is that these meetings are marketing events; these private equity staffers would know vastly more about the funds they’ve invested in if they actually read the documents the general partners provide. Instead, running around to dog and pony shows is oversight theater.
And no one questions the fact that these meetings are not paid for by the general partners, but are billed to the fund….as in the investors! So the expensive drinks and meals and shows are paid from your state and local taxes.
Weinberg has found another element of this corrupt practice…that of general partners subsidizing the travel and often lavish accommodations connected with the so-called limited partner advisory committees. These committees are chosen by the general partner and supposedly get more information than garden variety limited partners and have some say so.
As we’ll explain, the limited partner advisory committees are yet more oversight theater and serve general partner interests by having an inside group of high-profile investors seemingly bless the inner workings of the fund.
Weinberg exposes bribery at the advisory committee level. And before you depict that as an overstatement, recall that social psychologists have found that a gift as small as a can of soda predisposed a buyer to a sales pitch. Some companies prohibit outside parties from paying any expenses on behalf of employees.
From Weinberg:
Two Michigan pension fund officials attended a 2018 Apax Partners event at the Four Seasons Hotel in Florence, Italy, that featured “custom tailored activities and itineraries,” including tours of the Tuscan countryside on vintage Vespa scooters and a gala dinner at the 17th Century Villa le Corti.
The bill for the state: less than $200 for each official, according to public records obtained by Bloomberg. And Michigan is hardly alone in letting private equity firms foot most of the bill for luxury travel and trips by state pension fund managers, who are public employees.
Gaw Capital paid for most of the $21,127 business-class airfare for an Illinois fund official attending its 2018 meeting at the Renaissance Resort in Okinawa, Japan — the state paid just $392. Florida officials visited Milan, Rome and Paris last June, courtesy of JPMorgan Chase & Co. funds…
Those trips were all for officials to attend meetings as members of private equity firms’ limited partnership advisory councils, which have developed a reputation for taking place in posh, far-flung destinations…
Such LPACs are supposed to be a means of giving state officials a voice in how the firms invest public money. But some worry that the luxurious trips may unduly influence the officials who are treated to them.
“The cost of junkets is peanuts compared to other fees,” says Jeff Hooke, a finance professor at Johns Hopkins University and a critic of private equity. “I’m more concerned that these officials spend hours hearing one side of the story. They’re not hearing from the index fund managers.”
The line at CalPERS over 20 years ago, when $100 million was worth more than now, was that a $100 steak dinner would buy a $100 million commitment, is testament to the long-standing recognition of the soft corruption problem. Needless to say, the idea that going to Tuscany and getting feasts and fancy tours will enhance the ability of the public pension employees to do their job is ludicrous on its face.
Note that the article is not able to establish whether these advisory committee junkets are paid for by the investment managers or the funds, as in the investors. Given industry norms, you can be highly confident that the great majority of fund managers shift these costs to their investees.
Weinberg is forced to publish industry blather about the supposed value of these advisory committee meetings. It’s nonsense. From a 2015 post in the wake of a CalPERS workshop on private equity:
The Utter Powerlessness of Limited Partner Advisory Committees
Former SEC examination chief Andrew Bowden singled out limited partnership post-investment supervision as particularly weak in his famed 2014 “sunshine speech” (emphasis original): “…investor oversight is generally much more lax after closing.”
Yet when CalPERS CIO Ted Eliopoulos mentions limited partner advisory committees, one of the few post-closing supervision channels, you can hear him crank up the warmth in his voice. It’s as if he wants to make clear to the board that these groups are a big deal and the board should respect the special role that CalPERS enjoys by participating in them.
Sadly, the presentation failed to address how little power private equity limited partner advisory committees actually have.
First, the general partner selects who sits on the advisory committee. Needless to say, they almost always ensure that a majority of the committee consists of friends and allies. For example, the funds of funds sponsored by the big investment banks are significantly over-represented among advisory committee members. This is the case because general partners collectively pay investment banks billions in fees, which makes it almost impossible for the funds of funds to vote against general partner interests.
Second, the purview of the Advisory Committee is quite limited, typically to approving conflicts of interest and, sometimes, portfolio company valuations. But, even then, the deck is stacked against investors like CalPERS. The limited partnership agreements that we’ve published, like Blackstone’s, show that the advisory committee needs to go through a very cumbersome process to object to valuations. And, in the case of Blackstone, the issue ultimately ends up arbitrated by the New York Stock Exchange, where it is safe to assume that Blackstone has many friends.
Third, the existence of the advisory committee can actually work against the limited partners as a whole by providing a pretense of LP governance that is ultimately a sham. For instance, as was discussed in CalPERS’ investment committee meeting in October, Blackstone was engaged in an abuse called “termination of monitoring fees” which basically means charging monitoring fees to portfolio companies after the deal was sold. As JJ Jelincic pointed out then, Blackstone had notified the dozen or so members of the advisory committee about this practice, while hundreds of other investors were left in the dark. Yet apparently none of the advisory committee members did anything about it. Had the limited partners as a whole been informed, the odds of opposition would have been greater.
Finally, there are well-known stories in the limited partner community of the rare instances where a limited partner representative asked tough questions at an advisory committee meeting and, before he even got back to his office, his boss had received a call demanding that the individual never be sent to another advisory committee meeting.
As a result of these power dynamics, there is an underlying reality that, for the vast majority of limited partners, participating on advisory committees means little more than an excuse for a trip to New York or London, a nice meal, and socializing with other limited partners and the general partner. It’s a mistake to view it as anything more.
Back to the current post. We have been revealed to have not been sufficiently well informed (or alternatively, imaginative) about how lavish these private equity perks were. As JJ Jelincic says in the new Bloomberg account:
“I can’t remember an advisory committee meeting that wasn’t in a nice place,” says Joseph John “J.J.” Jelincic, a retired staffer and director of the California Public Employees’ Retirement System. “Probably the worst was Manhattan.”
Again, what is disheartening is that public pension fund senior executives and board members treat these gifts of public funds to their employees, laundered thought the fund managers, as something perfectly kosher because it’s a long-established bad practice and everybody does it. Sadly it’s hard to see how to break such deep cognitive capture.