Updated with correction
Increasingly concerned with the potential conflicts that arise when consultants straddle the line between investment manager and impartial adviser, institutional investors more and more are putting restrictions on how they use these firms.
The board of the $229.6 billion California Public Employees' Retirement System, Sacramento, last summer adopted a new policy that allows outside consultants for its private asset classes “to fulfill one of two roles — either offering opinions on the merits of an investment or assisting in the monitoring of the investment once CalPERS makes it,” stated Wayne Davis, CalPERS spokesman, in a written response to questions.
The policy specifically bars alternative investment consultants from managing investments, working on special projects for staff, or providing opinions to staff on specific investment transactions.
Other funds, including the Washington State Investment Board, Olympia, prohibit consultants from offering investment management services to the funds. Still others — such as the £5 billion ($12.7 billion) Merseyside Pension Fund, Liverpool, England — have established policies barring a consulting firm that offers investment strategy and asset allocation services from also recommending investment managers.
The concerns about conflicts apply to any investment consultant that also offers asset management, and aren't new to institutional investors. Still, experts say those concerns are heightened with alternatives consulting because investment management is more prevalent among alternatives consultants and because of the complexity of the investments. Increasingly, alternative investment consultants are adding co-investment funds, secondary-market strategies and fund of funds. Conflicts could arise if a pension fund wants to buy an investment for its own account that its consultant also wants to buy for its asset management arm.
"I think there are some large investors that would like their consultants to be pure-play consulting firms, rather than firms that may have conflicts. They want to make sure the consultant is working in the client's best interest without any issues of conflict surfacing,” said David I. Fann.
Mr. Fann is president and CEO of TorreyCove Capital Partners LLC, which was formed when a group of executives at alternatives manager and consultant Pacific Corporate Group did a management buyout of part of PCG's consulting unit. The new firm —based in La Jolla, Calif. — is offering consulting services only, Mr. Fann said.
“Almost every RFP or search (now) has some discussion about conflicts of interest. It's not new, but there is more emphasis on this than in the past,” he said.
The buyout that resulted in TorreyCove came 13 months after CalPERS fired PCG, which had served as its longtime consultant and also managed $2.5 billion in investments for the fund. According to a release from CalPERS at the time, the fund “severed all ties” with the firm.
Sources point to CalPERS' actions as a result of the large pension plan's discontent with consultants that advise and consult.
CalPERS officials declined to comment on why they fired PCG, except to say the change was part of an overall restructuring of its $ 31.9 billion private equity portfolio, according to a written statement released at the time by Chief Investment Officer Joseph Dear.