Pay to Play Pension Funds
4 More Firms Settle in Placement Agent Pay to Play ProbePrivate Equity Blogger and relates to the use of placement agents to get access to capital from pension funds. This is a wide-spread practice although private equity funds are primarily being targeted by the investigation in New York.
The use of placement agents has come under fire following a public investigation into the practice and investigations into whether a pay-to-play scheme is used in attracting capital from pension funds. The most recent development is that New York Attorney General Anthony Cuomo's investigation into pay-to-play arrangements between the state's pension fund and placement agents for investment funds has forced four more firms to settle. Reforming the current system has been met with some resistance especially from firms who argue that outlawing the use of placement agents puts smaller and new private equity firms and funds at a significant disadvantage in raising capital.
The four firms are: Access Capital Partners, Falconhead Capital, HM Capital Partners and Levine Leichtman Capital Partners. Each has agreed to adopt the rules proposed by Mr. Cuomo barring the use of placement agents to attract funding from pension funds. Additionally, each firm will pay a total $4.5 million in damages. Carlyle Group and Riverstone Holdings already settled with the Attorney General.
“With seven firms now having signed our code of conduct, momentum is building in the industry to make our code the national standard to eliminate pay-to-play in public pension funds across the country,” Cuomo said.Meanwhile, the SEC's proposed guidelines that aim to clean up the pay-to-play system may have a very damaging effect on new and smaller private equity firms. The current system (ethical, or not) enables small and newly launched private equity firms to net capital from investors that it otherwise probably would not have access to. The big buyout shops are able to use name recognition and a proven track record to entice investors without the need of placement agents, although some big firms use them anyway.
Six people have been indicted so far in the scandal at the New York State Common Retirement Fund. Two have pleaded guilty for their role in the scheme which paid kickbacks to a pair of top aides to former New York Comptroller Alan Hevesi, whose office oversees the Common Retirement Fund.
HM Capital and Falconhead both employed a firm run by a key Hevesi aide indicted in the scandal, Hank Morris, while Access and Levine Leichtman unknowingly hired firms that split fees with Morris. Access had hired Barrett Wissman, who has pleaded guilty for his role in the pay-to-play scheme, who in turn allegedly paid off Morris to win the firm business. Source
Without using such agents, small and new funds will have a tougher time raising money, critics say. While large, established firms are well known enough to simply contact a pension fund directly, smaller funds without a brand or history have a far tougher job getting heard. "I think the proposal's a bit draconian, particularly on banning placement agents," said Steven Kaplan, a professor of finance at the University of Chicago.
Supporters of the placement agent industry -- which includes brand name firms such as Credit Suisse's (CSGN.VX) placement agent unit and Blackstone Group's (BX.N) Park Hill Group -- argue that their role has no similarity with political fixers, and they should not be tarred with the same brush. Source
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