NEW YORK -- Institutional investors in the once high-flying Lazard Freres Real Estate Investors funds hired a lawyer following the forced departure of Arthur Solomon.
Mr. Solomon was the Lazard partner who ran the $2.3 billion megafunds.
In addition, sources said the $46 billion Pennsylvania Public School Employees' Retirement System, Harrisburg, has put future commitments to the Lazard Freres funds on hold.
Around 80% of the pension funds that are limited partners in the Lazard real estate partnerships agreed to organize, naming General Motors Investment Management Co., New York, their representative to communicate with Lazard executives, sources said. Tom Dobrowski, GM's managing director of real estate and alternative investments, didn't return calls seeking comment.
Investors' concerns
The pension fund investors have been concerned about performance and about who is going to run the funds. Several have said privately they would like to get out of their commitments if they could. They have hired a lawyer to determine if the management change gives them an out. One source said there are mechanisms for replacing Lazard Freres as manager, but that no one has made a move in that direction yet.
Meanwhile, the limited partners also are trying to hire an outside auditor to determine the true valuations.
Mark Barnard, director of private investments for the $12 billion endowment of Howard Hughes Medical Research Institute, Annapolis, Md., said his concern is the health of the companies in the LF Strategic Realty portfolios, and whether they are well-capitalized.
"It will take time to see if they (Lazard) made good investments," observed Mr. Barnard.
The limited partners are bound by their contracts with Lazard to fund their commitments as they are called, or pay big penalties.
Matthew Lustig, managing director and acting chief executive officer of the Lazard real estate funds, said 21/2 months after Mr. Solomon was ousted, Lazard made a "picture perfect" capital call for $355 million.
"All the money came in either early or on time, and we were very pleased," Mr. Lustig said.
People with knowledge of the matter said the $800 million LF Strategic Realty Investors I is 90% invested, and the $1.52 billion LF Strategic Realty Investors II has invested $1.3 billion to date.
Mr. Solomon ran Lazard Freres' real estate business for 11 years, and raised billions from the nation's biggest pension funds. He was ousted in April, reportedly over differences in how the funds should be invested, and the valuations of those investments.
Neither Mr. Solomon nor Lazard executives would discuss the reasons. Nor would Lazard say how the funds have performed in 1999.
But sources said Lazard has been making accounting changes in the way it values its real estate investments, marking the public investments to market, which made the first-quarter performance reports look bad because of a lagging real estate market. No change has yet been made in the valuation of the private investments.
Major concern
A major concern for the partners is the management changes. Mr. Lustig said Lazard has been conducting a search to find a successor to Mr. Solomon, in hopes of naming him or her by the end of the summer.
Tom Hassard, manager of the real estate program at the $34 billion Virginia Retirement Systems, Richmond, said the system has funded about 90% of its commitment to LF II at this point. "We're concerned when personnel comes and goes, and we expect them to manage it," he emphasized. He added that as far as he can tell, there is no contract escape clause.
Patrick Mitchell, chief investment officer at the $101 billion California State Teachers' Retirement System, Sacramento, concurred, saying the limited partners are legally bound to continue their contracts with Lazard. CalSTRS invested only in the first fund, and the entire $150 million commitment has been funded, Mr. Mitchell said.
A limited partner who had attended investor meetings said there had been a power struggle between Mr. Solomon and the top brass at Lazard. He recalled that at one meeting, Lazard executives had shown charts illustrating how Mr. Solomon had committed $1.608 billion to investments when he only had $1.52 billion available to spend. "In a technical sense he overcommitted," the limited partner said.
But another limited partner said the fund was allowed to leverage up to 60%, so it could overcommit on investments. "This kind of thing occurs every day in these opportunity funds," he said.
Another member of the real estate team, Murry Gunty, also was terminated, while a third, Rob Freeman, resigned.
Many limited partners who were fans of Mr. Solomon's were dismayed that he was gone, and so quickly.
After the ouster, Mr. Solomon sued Lazard for breach of fiduciary duty and defamation of character. In June, the parties settled, but terms were not disclosed.
In addition to those that were mentioned above, limited partners in the Lazard funds include Aluminum Co. of America; Allstate Corp.; AT&T Co.; Bell Atlantic Master Trust; Chase Capital Partners; Chrysler Corp.; Public Employees Retirement Association of Colorado; Government of Singapore Investment Corp.; IBM Corp.; Illinois Municipal Retirement Fund; Illinois State Board of Investment; New York State Common Retirement Fund; Polaroid Corp.; Utah State Retirement System; State of Wisconsin Investment Board; and the International Bank for Reconstruction and Development.
