Bloomberg’s Neil Weinberg uncovers another layer of the soft corruption that pervades private equity deals with modestly paid public pension fund managers in a new article, Tuscany for $200? Private equity pays for luxury travel from public pension funds.
We have repeatedly mentioned the universal practice of limited partners like CalPERS and CalSTRS sending private equity staff members to meetings hosted by the general partner in glamorous destinations with lavish wine and food and often high-end entertainment. level (like Elton John/Rolling Stones level) . The excuse for these meetings is that the limited partners are informed. The reality is that these meetings are marketing events; these private equity staff would know a lot more about the funds they invested in if they actually read the materials provided by the general partners. Instead, running to dog and pony shows is surveillance theater.
And no one is questioning the fact that these meetings are not paid for by the general partners, but invoiced to the fund….just like investors! So expensive drinks, meals and shows are paid for by your state and local taxes.
Weinberg found another element of this corrupt practice… that of sponsors subsidizing travel and often lavish accommodations linked to so-called sponsor advisory boards. These committees are chosen by the sponsor and supposedly get more information than garden variety sponsors and some have a say.
As we will explain, LP Advisory Boards are even more of an oversight theater and serve the interests of GPs by having an internal group of high profile investors seemingly bless the inner workings of the fund.
Weinberg exposes corruption at the advisory board level. And before you describe that as an exaggeration, remember that social psychologists have found that a gift as small as a can of soda predisposes a buyer to a sales pitch. Some companies prohibit third parties from paying expenses on behalf of employees.
Two Michigan pension fund executives attended a 2018 Apax Partners event at the Four Seasons Hotel in Florence, Italy, which featured “tailor-made activities and itineraries,” including tours of the Tuscan countryside on scooters Vintage Vespa and a gala dinner at the 17th Century Villa le Corti.
The state bill: less than $200 for each official, according to public records obtained by Bloomberg. And Michigan isn’t alone in letting private equity firms foot the bulk of the bill for luxury travel and travel for state pension fund managers, who are public sector employees.
Gaw Capital paid for most of the $21,127 business-class airfare for an Illinois fund official attending its 2018 meeting at the Renaissance Resort in Okinawa, Japan — the state only paid than $392. Florida officials traveled to Milan, Rome and Paris last June, thanks to JPMorgan Chase & Co.…
These trips were all for officials to attend meetings as members of the advisory boards of limited partnerships of private equity firms, which have earned a reputation for taking place in posh and far-off destinations…
These LPACs are meant to be a way to give state officials a voice in how companies invest public money. But some fear that luxurious trips could unduly influence the officials who are entitled to them.
“The cost of junkets is peanuts compared to other fees,” says Jeff Hooke, a Johns Hopkins University finance professor and private equity critic. “I’m more concerned that these officials are spending hours hearing one side of the story. They don’t hear about index fund managers.
The line at CalPERS more than 20 years ago, when $100 million was worth more than it is now, was that a $100 steak dinner would buy a $100 commitment, a testament to the longstanding recognition of the problem of sweet corruption. Needless to say, the idea that going to Tuscany and throwing fancy feasts and tours will improve the ability of public pension workers to do their jobs is ludicrous on the face of it.
Note that the article is unable to establish whether these advisory board meetings are paid for by the investment managers or the funds, as with investors. Given industry standards, you can be very sure that the vast majority of fund managers pass these costs on to their issuing companies.
Weinberg is forced to post industry profanity about the supposed value of these advisory board meetings. It makes no sense. Excerpt from a 2015 post following a CalPERS workshop on private equity:
The Complete Helplessness of Sponsor Advisory Committees
Former SEC examination chief Andrew Bowden called post-investment oversight of limited partnerships particularly weak in his famous 2014 “speech of the sun(emphasis in original): “…investor oversight is generally much more lax After closing.”
Yet when CalPERS CIO Ted Eliopoulos mentions Sponsor Advisory Boards, one of the few channels for post-closing oversight, you can hear him increase the warmth in his voice. It’s as if he wanted to impress on the board that these groups are important and that the board should respect the special role that CalPERS enjoys by participating in them.
Unfortunately, the presentation did not address how little power private equity sponsor advisory boards actually have.
First, the general partner chooses who sits on the advisory board. Needless to say, they almost always ensure that a majority of the committee is made up of friends and allies. For example, funds of funds sponsored by major investment banks are vastly overrepresented among advisory board members. This is because general partners collectively pay billions to investment banks in fees, making it nearly impossible for funds of funds to vote against the interests of general partners.
Second, the advisory board’s jurisdiction is quite limited, typically to approving conflicts of interest and sometimes valuations of portfolio companies. But, even then, the game is stacked against investors like CalPERS. The limited partnership agreements that we have published, such as Blackstone’s, show that the advisory board has to go through a very cumbersome process to object to valuations. And, in Blackstone’s case, the matter ends up being arbitrated by the New York Stock Exchange, where it’s reasonable to assume that Blackstone has many friends.
Third, the existence of the advisory board may actually work against the limited partners as a whole by providing a semblance of LP governance that is ultimately a sham. For example, as discussed at the CalPERS investment committee meeting in October, Blackstone engaged in an abuse called “supervisory fee termination”, which essentially means charging supervisory fees to companies. portfolio after the sale of the transaction. As JJ Jelincic then pointed out, Blackstone had informed the dozen members of the advisory board of this practice, while hundreds of other investors were left in the dark. Yet apparently none of the advisory board members did anything about it. If the sponsors as a whole had been informed, the chances of opposition would have been greater.
Finally, there are well-known stories in the sponsor community of rare instances where a sponsor representative asked tough questions during an advisory board meeting and, before he even returned to his office, his boss had received a call demanding that the person not be sent to another advisory board meeting.
Because of these power dynamics, there is an underlying reality that for the vast majority of sponsors, participating in advisory boards means little more than an excuse for a trip to New York or London, a good meals and socialize with other sponsors and the general partner. It is a mistake to consider it as something else.
Return to current position. It was revealed to us that we had not been knowledgeable enough (or alternatively, imaginatively enough) about the lavishness of these private equity perks. As JJ Jelincic puts it in the new Bloomberg account:
“I can’t remember an advisory board meeting that didn’t take place in a nice place,” says Joseph John “JJ” Jelincic, a retired employee and director of the California Public Employees’ Retirement System. “Probably the worst was Manhattan.”
Again, what’s discouraging is that senior executives and board members of public pension funds are treating these gifts of public funds to their employees, whitewashed fund managers thought, as something perfectly kosher because it’s a long established bad practice and everyone is doing it. Unfortunately, it’s hard to see how to break such deep cognitive capture.
