RALEIGH — The state pension fund has secured nearly $15 million in refunds and fee discounts from eight investment managers who used placement agents to secure business from the fund.
Treasurer Janet Cowell’s office disclosed the agreements in a 131-page report issued Monday. The report summarizes the findings of a review of the role placement agents played in securing investment dollars from the fund between 2002 and 2008, when Democrat Richard Moore was state treasurer.
Placement agents are middlemen who help line up investment firms to handle hundreds of millions of dollars in state pension money. The Securities and Exchange Commission and several state attorneys general have investigated pay-to-play schemes, in which investment managers and placement agents use political connections and favors to get business.
The use of such agents became an issue in North Carolina in 2009 after it was disclosed that the state’s chief pension investment officer, Patricia Gerrick, was offered favors. Cowell, a Democrat, fired Gerrick and implemented a number of reforms designed to increase transparency, including requiring investment managers to disclose when they have retained placement agents and the fees paid to them.
The report issued Monday calls for further reforms, including requiring placement agents to register as lobbyists and requiring Treasurer staff, placement agents and investment managers to disclose any preexisting relationships that might require them to recuse themselves.
The Treasurer’s office will also create a commission early next year to review the state’s governance structure for investment management. North Carolina is currently one of just four states with a sole fiduciary – the state treasurer – who makes all investment decisions in consultation with staff.
“What we’re putting in place will really put us at the forefront of public funds nationally in terms of disclosure, in terms of accountability,” Cowell said in an interview. “It’s going to go far beyond some of the other funds nationally that have had problems with these issues.”
The additional reforms came after the Treasurer’s office reviewed how nine investment managers had secured business with the pension fund. The managers were identified as part of a special review conducted by the outside law firm Kellogg Huber. They include Avista Capital Holdings; C.B. Richard Ellis Global Investors; Earnest Partners; Longview Partners; Angelo, Gordon & Co.; Apollo Global Management, Horsley Bridge Partners; Robeco Institutional Asset Management; and StarVest Partners.
The reviews found examples of favors being offered and existing relationships between pension fund investment staff and those seeking to manage some of the pension fund’s money. In one instance, Avista’s co-CEO, Tom Dean, said then-Treasurer Moore asked Dean to hire Aqueduct Capital Group to conduct additional due diligence on Avista’s fund, according to the report.
The president of Aqueduct, Frank Edwards, had a close relationship with Moore, according to the report; Edwards and his wife made several campaign donations to Moore’s campaign. Avista later retained Aqueduct, and the state’s pension fund made a $100 million investment in Avista’s fund. Avista then paid Aqueduct a fee of $1 million.
Moore said Monday that he was troubled by the report, which he described as “outlandish and unprofessional.”
“I am greatly troubled by the numerous factual inaccuracies – and I mean numerous,” he said. Speaking in regard to Kellogg Huber and the Treasurer’s office, he added, “This crowd never asked to speak with me, and I don’t understand why. ... I’m extremely proud of the work I did as treasurer for the people of North Carolina.”
All but C.B. Richard Ellis Global Investors agreed to make policy changes that satisfied North Carolina officials as a result of the review.
The state pension fund, which provides retirement benefits for teachers and state employees, had $83.1 billion in assets at the end of the third quarter. That money is managed by 25 in-house investment professionals as well as more than 100 investment managers.
Cowell estimated that about 50 percent of the state pension funds transactions involve placement agents.
“Going forward, it will probably be less than that because our policies will in certain instances ban placement agents,” she said.
But Cowell said completely banning the use of placement agents is not really an option, since many small and minority firms can’t afford full-time marketing help.
“Those that have fully banned placement agents have found that to be somewhat problematic,” she said. “So I think our approach of disclosure and transparency ... this will probably be a new model for the industry,” she said.
Bracken: 919-829-4548; Twitter: @brackendavid