CalPERS asks Apollo about Epstein news

CalPERS is pressing Apollo Global Management LLC, one of its private equity managers, over co-founder Leon Black's relationship with registered sex offender Jeffrey Epstein.

"CalPERS takes this issue very seriously. The actions our general partners take, both in professional and private contexts, impact our assessment of which firms we desire as long-term partners," said Megan White, spokeswoman for the $376 billion California Public Employees' Retirement System, Sacramento, in an email.

The market value of CalPERS' investment with Apollo was about $1.7 billion as of June 30, 2018, according to CalPERS' fiscal year 2018 investment report, its most recent. Apollo had $312 billion in assets under management as of June 30.

Mr. Epstein was found dead in his cell at the Metropolitan Correctional Center in New York on Aug. 10, awaiting trial on federal charges of operating a sex trafficking ring. In 2008, he pleaded guilty to Florida state charges of prostitution, one involving a minor, and was sentenced to 18 months in prison.

Reading from a memo to employees during Apollo's July 31 earnings call, Mr. Black said Mr. Epstein was on the board of the Black Family Foundation when it was created in 1997. Mr. Epstein resigned from the board in 2007, Mr. Black said, even though foundation federal tax filings continued to list him as a director for several years afterward. That discrepancy was a mistake, Mr. Black said.

Mr. Epstein also had provided professional services to Mr. Black's family partnership and other family entities, Mr. Black said. In addition, Mr. Black said that he donated to charitable organizations affiliated with Mr. Epstein and Mr. Epstein donated to charities affiliated with Mr. Black.

Mr. Black said on the call that his links with Mr. Epstein have not affected Apollo's relationship with its investors. He also said the firm itself did not have a connection to Mr. Epstein.

"We're entering our 30th year of business right now. And there is nothing that's more important to us than our relationship with our investors. So we take this all extremely seriously," Mr. Black said in response to questions concerning Mr. Epstein's relationship with him and Apollo during the earnings call.

"There has been a virtual tsunami in the press on the subject. … For the press, it's salacious. It involves elements of politics, of me-too, of rich and powerful people and my guess is it will continue for a while," Mr. Black said.

"Most important, I was completely unaware of and I am deeply troubled by the conduct that is now the subject of the federal criminal charges brought against him," Mr. Black said.

Reactions by CalPERS' board members varied widely.

"There's nothing to say about Apollo, unless you think we should react to everything we read in the papers." said Henry Jones, who chairs the CalPERS governance committee, in a July interview.

CalPERS CEO Marcie Frost said in a July interview — before a decision to contact Apollo had been made — that pension fund executives would engage with Apollo if they viewed Mr. Black's relationship with Mr. Epstein as a risk. However, CalPERS engagement efforts are confidential, she said.

Other retirement systems making commitments to Apollo within the past 18 months include the $152.5 billion Teacher Retirement System of Texas, $80.4 billion Virginia Retirement System, $29 billion Pennsylvania State Employees' Retirement System, $20.1 billion Teachers' Retirement System of Louisiana and $2.6 billion Oklahoma Police Pension & Retirement System. Pension fund representatives either declined comment or did not respond to requests for comment.

The $236.9 billion California State Teachers' Retirement System, West Sacramento, did receive a letter Apollo sent to its investors, said spokeswoman Vanessa Garcia, but she declined to share its contents.

Mr. Black's letter to investors, dated July 31, is similar to the email he sent Apollo employees five days earlier. In it, he stressed the firm has never done business with Mr. Epstein and that neither Mr. Epstein nor any company he controlled had ever invested in any Apollo funds.

"Shortly after the initial reports of Mr. Epstein's arrest, Apollo reviewed its records and confirmed what we originally understood — Apollo does not have, and never has had any relationship with Mr. Epstein," stated the letter, which Pensions & Investments obtained separately.

In an email, Ms. Garcia said: "CalSTRS recognizes that sexual harassment and misconduct incidents can result in significant operational, financial and reputational risks to CalSTRS' portfolio holdings." In a separate email, she added: "CalSTRS continually monitors its holdings, engages companies and collaborates with general partners to monitor and address the risks in the portfolio and develop and implement action plans to mitigate them."

Executives at Meketa Investment Group, CalSTRS and CalPERS' general investment consultant as well as CalPERS' private equity consultant, declined comment.

One consulting firm executive said they are monitoring the situation. "Currently we are collecting information as it becomes available and will make appropriate recommendations to clients when, and if, warranted," said Stephen Nesbitt, CEO of Cliffwater LLC, Marina del Rey, Calif,. in an email.

Apollo's stock price has been trending downward since the July 31 conference call; it closed at $31.11 on Aug. 15, down from $33 the day of the call. However, over the past 12 months, Apollo's stock has swung from a high of $36.49 to a low of $22.63. The stock closed at $33.57 on Aug. 16, 2018.

So far, Apollo's price on the alternative investment secondary market has remained unchanged.

"At this time, secondary prices have not been affected in private equity funds whose principals were involved with Jeffrey Epstein," said Laurence Allen, Rye Brook, N.Y.-based CEO and managing member of secondary market brokerage firm NYPPEX in an email.

In the past, limited partnership interest prices of funds managed by other firms affected by scandal fell, but not immediately, he said.

"Secondary bid indications at NYPPEX declined for interests in certain funds sponsored by Abraaj (Investment Management), DFJ (now called Threshold Ventures) and TPG Growth when bad news was made public," he said.

Over time, the secondary markets evaluated the news and took into consideration each fund's ability to generate returns, Mr. Allen said adding that Abraaj's secondary market pricing was affected the most of the three examples.

"Some Abraaj funds were the most severely impacted in the secondary market as certain limited partners elected to get out at any price," he said. "At NYPPEX, secondary price executions for interests in some Abraaj funds were as low as the mid-30s (as a percentage of the fund's net asset value)."

Still, secondary market prices in the mid-30s are logical if the limited partner is unsure about the impact of leverage from third parties and the fund portfolio's fair value is in question due to accounting issues, Mr. Allen said.