DealZone

Pay-to-play funds scandal: Time for a change

April 17, 2009

primackDan Primack is the editor of peHUB, a Thomson Reuters publication.

The New York State Pension Fund kickback scandal is making new headlines. The Wall Street Journal reported that Steven Rattner, the head of the Obama administratino’s auto task force, was one of the executives involved with payments that are under scrutiny, citing a person familiar with the matter.

On Thursday, New York State Attorney General Andrew Cuomo filed a criminal complaint against Raymond Harding, former chair of New York’s Liberal Party, for scheming with the already-indicted David Loglisci and Hank Morris. Cuomo also coaxed a guilty plea and financial remuneration out of Barrett Wissman, a crooked former hedge fund manager.

All of this got me to thinking more about the issue of raising fund capital from public pension systems, a process that often is just begging to be corrupted. Inexperienced and smaller general partners (GPs) can have real difficulty getting in front of a pension system’s investment staff, because there is rarely a transparent or streamlined process.

The result is that many of these GPs hire a “finder,” which is typically a politically-connected individual who can gain access from the top-down. Most of these finders aren’t splitting their fees with the pension system’s investment staff – a quid pro quo that allegedly occurred in New York – but even the most above-board of these relationships boils down to influence peddling from my humble perspective.

Here’s how one GP explained it: “We hire finders because there’s sometimes no other way to get our 20 minutes in front of someone from the [pension system’s] investment staff. We’re not paying the finder for the fund commitment, but just for the opportunity to make our case and then have the system or its consultant conduct due diligence on us.”

So let me make a modest proposal: Public pension systems should participate in a modified version of M&A deal-flow circuits. For the uninitiated, deal-flow circuits are structured networking events (often featured as part of industry conferences) in which a group of buyers (bankers, PE investors, etc.) get introduced to a group of sellers (CEOs, PE pros with portfolio companies to shop, etc.). Each buyer typically sits at his/her own table, and the sellers sit with them for pre-determined periods of time, before rotating to the next buyer. Kind of like financial speed-dating.

The same format could be applied to the GP/LP dynamic. Rent out a ballroom for two days, and invite senior staff from lots of public pension systems (and some private LPs too, if they’d like to participate). They would be the buyers, and would each get their own table. Then invite GPs who are actively looking to raise fund capital, with some sort of pre-qualification process to screen out the nutjobs. Then let the GPs make their 15 or 20-minute elevator pitches to the LPs. Not in order to get an immediate commitment, but just to get the face-time. Then the LPs can reflect on their meeting sheets, and determine which opportunities are worthy of further due diligence.

Most GPs can accept striking out with a particular LP. What frustrates them is when they don’t even get an at-bat.

A fund-raising circuit could assuage that frustration, and remove some of temptation to use politically-connected finders (and thus reduce both actual corruption and the appearance of corruption). It wouldn’t be a total panacea, but it would be a start.

Comments
7 comments so far | RSS Comments RSS

How do we know the finders are not splitting fees with the pension fund investment staff?

Posted by rbsjr | Report as abusive
 

Yes, but why would the finders allow such a system to come into place? This is the problem with perverse incentives applied to people with power to change the system.

 

With all of the financial scandals we’ve endured over the last year I’m curious to know why Bernie Madoff is the only guy in jail. I voted/volunteered/donated to Obama but every time he appoints a good-old-boy to a position of power he loses credibility in my eyes.

Posted by Hilary Smith | Report as abusive
 

I’m with you Hilary Smith,

I voted for Obama, as the lesser of two evils, and thought “well, if he walks the walk instead of just talking the talk”, just maybe there is a chance America can be saved yet.

But it looks more and more like Washington is the same old Wall Street suits with a different set of names and faces, but Wall Street Suits just the same.

This is what we get, when some 30 years ago, we put a bunch of Wall Street investment bankers with their “Milton Friedman Free Market” dogma and their unhealthy fixation on next quarters profit and bonus, in charge of the planning for the long-term financial health of this country.

“Free Market” my arse! This market has been captured, shackled and imprisoned by Wall Street and their Global Corporate partners many, many years ago. That my friend is why they are bailed out and you are/will be thrown to the dogs. And to think that these same monstrous corporations have been granted the rights of American citizenship is truly sickening. They’ve cut our throats and now will sell our blood to the highest foreign bidder.

Posted by John G | Report as abusive
 

John G,
Could you explain “Milton Friedman Free Market” dogma to me?

Posted by Troy | Report as abusive
 

Like it or not, I firmly believe we are part of the most gargantuan historical happening in the past 100, maybe 200 years.!

All dynasties must end – at some point.

The Roman Empire and, much more recently, the British Empire, both ended. Over the centuries, many other dynasties have risen, enjoyed and then fell.

The USA has dominated the world, particularly since the end of WW2.

Today, the standard of living of any society can be measured by the amount of energy consumed. With 6 to 7 % of the world’s population, the US consumes 50% of the world’s energy. Problem here is that the vast majority of this energy consumption is “Easy life” energy and not “nuts and bolts” energy, like steel making, auto production, chemical plants etc.

Lee Iacoca, warned in the 70′s – “The US better watch it or we will end up a nation of wall to wall hamburger stands!” – Look around.

If the US can pull out of today’s’ scenario and still rule the financial world, still have the highest standard of living in the world, I will believe the US can pull out of anything.

I think not, I believe not. Standards of living are already deteriorating – very fast!

Hundreds of thousands of homes stand empty, while tens of thousands of families need homes!

The big three are on the verge of bankruptcy. Pensions and health care will be cut drastically – or worse, disappear!

The US is printing and borrowing money at record paces – where will the production come from to pay all this back? It will come from the backs of the citizens – in the form of a greatly reduced standard of living.

No, I am not a pessimist – just a realist.

Posted by Lefty Noonnan | Report as abusive
 

You are all right. Treasury is a revolving door for Wallstreet administration after administration. I just see more Republican and Democratic retreads. Where is the change that our President promised?

Posted by Anubis | Report as abusive
 

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