SAN FRANCISCO - After months of dissension at the $11 billion San Francisco City & County Employees' Retirement System over the selection of a new alternatives consultant, board members and staff were stunned last week when Pacific Corporate Group suddenly dropped out of the contest.
Christopher Bower, PCG's chief executive officer, said: "The inability to agree on contract terms, coupled with unabated, baseless attacks on PCG's qualifications and integrity, led us to conclude we could not proceed in this engagement.... We hold the system in the highest regard and are open to working with them in the future if circumstances are right for both parties."
The surprise withdrawal came after months of wrangling among board members following a decision to replace longtime alternatives consultant Cambridge Associates LLC, Boston, with PCG of La Jolla, Calif.
The board's selection of PCG came despite a recommendation by the pension fund's staff to retain Cambridge and despite the fact PCG's fee would be 25% higher than Cambridge's. Also, Angeles Investment Advisors LLC, Santa Monica, Calif., the system's consultant, had favored Cambridge over PCG.
Meanwhile, retirees and one trustee (known as commissioners) mounted a full-scale protest and asked the board to rescind the vote. They emphasized they didn't see any reason to change consultants since PCG was charging more and Cambridge had achieved superior returns for SFERS, averaging 21% a year during its 14-year tenure. Cambridge has been the system's alternatives consultant since the program's inception in 1988.
But Cambridge isn't a shoo-in now that PCG has bowed out.
Instead, said board President Al Casciato, the process will begin anew. "I've asked staff to give me information. I want to know why three people are assigned to alternatives. Why do we need a consultant? I want them to justify why we need one. What is the efficient way of managing this portfolio? The board wants to hear back from staff before we decide whether to issue a new RFP." Mr. Casciato said.
Herb Meiberger, the commissioner who favored retaining Cambridge, emphasized: "Staff recommended them, and it's very unusual to go against the staff's recommendation." He also pointed out the three commissioners appointed by San Francisco Mayor Willie Brown had voted for PCG, while the elected commissioners favored Cambridge.
But P.J. Johnston, Mayor Brown's spokesman, said the mayor has no active role in retirement commission matters and wouldn't comment on this one. "However, most of those involved with contracts in city government think it wise and prudent to change consultants regularly to be sure they are getting sound advice and to have a breath of fresh air on the consultants' side, since there is turnover on the board as new members are elected or appointed," Mr. Johnston added.
The 4-1 vote for PCG took place Feb. 5, when Mr. Meiberger was on vacation. His request for a revote was denied in a tie vote.
Staff then was directed to negotiate a contract with PCG, which agreed to lower its fee for the first year to $825,000 from $900,000, still higher than the $800,000 fee requested by Cambridge.
Clare Murphy, executive director of the San Francisco pension fund, said staff originally recommended both Cambridge and PCG, then picked Cambridge when asked to refine the recommendation. "There have been two other instances when the board hired private equity firms as well as an array of investment managers that the staff had not recommended," Ms. Murphy said.
Angeles Investment, the system's general consultant at the time, also favored Cambridge, according to Ms. Murphy, although they did not specifically recommend Cambridge. Officials at Angeles declined to discuss the situation.
Link to Enron
Mr. Meiberger said PCG had scant experience with venture capital partnerships, which make up a large portion of the SFERS private equity portfolio. He and others also were nervous about PCG's link to Enron Corp. PCG had guided the giant California Public Employees' Retirement System, Sacramento, to invest more than $750 million in three Enron partnerships, starting in 1993, according to public documents.
Officials at Cambridge declined to comment on the matter.
Private equity experts also questioned the system's plan to switch consultants.
George Siguler, managing director at Siguler Guff & Co. LLC, a New York-based private equity firm, which has done business with Cambridge but not with PCG, observed: "For a fund to change consultants just for the sake of change, when the consultant has run a successful program, is one of the poorest excuses I've ever heard. Anything other than poor performance or substantial turnover is not a good reason for change."
Cambridge also has excellent venture capital connections, he noted. "Cambridge got them into many partnerships they might not have gotten into otherwise," he said.