The state agency running the College Illinois prepaid tuition program and Chicago-based financial services firm Mesirow Financial are at odds over money the state owes for Mesirow's review of three investments made in 2010 and 2011.
Mesirow has the potential to earn as much as $1.4 million from its investment review for the Illinois Student Assistance Commission, according to a recent in-depth management audit of College Illinois by Illinois Auditor General William Holland. To date, Mesirow says, it's been paid $271,875.
In an e-mail, Mesirow declined to say how much in total it believes ISAC owes, but said the sum includes at least another $170,000 for completed due diligence reports.
“Discussions with ISAC to resolve the remaining unpaid fees have not resulted in a settlement to date,” a Mesirow spokeswoman said in the e-mail.
An ISAC spokesman declined to comment other than to say the two sides were in talks. Mesirow's due diligence contract, which was to run through June 2013, has been canceled.
ISAC hired Mesirow to perform “due diligence” studies of three real estate funds, as the agency's former executive director, Andrew Davis, expanded its $1.1 billion portfolio supporting the college savings of more than 30,000 Illinois families from a stocks-and-bonds fund to include alternative asset classes.
Following a 30% long-term funding shortfall last year, along with misleading agency marketing that led participants to believe incorrectly that the state guaranteed their college savings, Gov. Pat Quinn appointed new ISAC commissioners, who ousted Mr. Davis in July. College Illinois is closed to new investors, as the commission attempts to fix the ailing program.
The special state audit highlighted an unusual compensation arrangement with Mesirow, by which the firm was paid in part if ISAC went ahead and invested in a fund Mesirow reviewed.
“By paying Mesirow on this basis, ISAC may have created an incentive for Mesirow to recommend the investments,” according to the audit.
In fact, Mesirow recommended ISAC invest in one fund, Kennedy-Wilson III, that the firm had rejected “on behalf of other discretionary funds managed by Mesirow,” according to the audit, which added that Mesirow divulged the reason for the rejection. The audit didn't say what that was, but the Mesirow spokeswoman said that "ISAC had much more to invest, which gave it enough leverage to negotiate, with our advice, better terms than our fund could do."
But, the Mesirow spokeswoman said in the e-mail, “We did not propose the contingent fee structure. Our original proposal for the additional work was based solely on a retainer and due diligence fee.”
Mesirow's understanding was that ISAC insisted on the contingent fee as a way to reduce retainers and cut back on committed expenditures.
The three real estate investments Mesirow reviewed — made in 2010 and 2011 and totaling $66.6 million—were worth $68 million, a 2.2% gain, as of Dec. 31, according to ISAC's most recent College Illinois investment report.
In addition, ISAC hired Mesirow as a real estate investment manager, before calling on the firm to review other real estate funds. The agency invested $11.69 million in the Mesirow Value real estate fund on March 29, 2011, and that investment declined 5.6% to $11.42 million at yearend, according to the College Illinois investment report.
Steve Daniels is a writer for Crain's Chicago Business, a sister publication of Pensions & Investments.