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