Blackstone Group is challenging a CalPERS proposal to prohibit money managers from dangling contingency fees in front of middlemen who help win pension fund contracts.
The $205.8 billion California Public Employees’ Retirement System, Sacramento, is pressing for a law requiring so-called placement agents to register as lobbyists and ending pay-for-success arrangements similar to those of personal-injury lawyers. The bill is to get its first public airing at a legislative hearing today.
The proposal follows federal and state investigations into influence peddling for access to the $2 trillion in U.S. public retirement funds. CalPERS in December said that a former board member received more than $59 million soliciting business for investment companies such as Apollo Management.
California Attorney General Jerry Brown is investigating the use of placement agents, and the SEC is heading an inquiry into California pension funds, court documents show.
Blackstone owns a placement-agent unit called Park Hill Group that’s solicited more than $110 billion for private equity, hedge fund, venture capital and real estate funds, according to its website.
Blackstone is employing California Strategies, a firm with a roster of former state officials, to lobby against the contingency fee provision of the bill, Blackstone spokesman Peter Rose said.
Blackstone and the Securities Industry and Financial Markets Association contend that smaller investment firms, unable to afford in-house marketing teams or retainers for placement agents, would be helpless to market themselves without the use of contingency fees.
“None of us in the industry like the scandals that have broken out in places like New York and California,” Mr. Rose said. “But a ban on contingency fees is harmful on these smaller funds that don’t get the fees until they get the money to invest.”
CalPERS says that’s just not true. A senior pension fund executive is wholly committed to looking for new or small money managers, California Treasurer Bill Lockyer said. A dedicated e-mail account allows such firms to send proposals directly to CalPERS investment staff.
“Of the small funds that have approached CalPERS, fewer than half have actually used a placement agent,” Joe Dear, CalPERS chief investment officer, told the fund’s board in March. “There’s clear evidence in past practice that it’s possible to develop an investment relationship with us by making a normal approach, without the assistance of a contingent-paid placement agent.”
If the placement agent bill fails, Mr. Lockyer said he’ll propose an outright ban on placement agents at CalPERS and the $132.6 billion California State Teachers’ Retirement System, West Sacramento.