Tuesday, August 28, 2012

Investment Loss - Allegra Capital

I previously commented on the notice that Allegra Capital Partners IV, LP had exited its limited partnership with NYCERS as of the first quarter of 2011. Pacific Corporate Group had notified the NYCERS trustees of this on September 16, 2011.  NYCERS first invested in the Allegra private equity deal in FY-2000. It was the third private equity deal NYCERS entered into. NYCERS currently has approximately 150 open private equity investments.

Allegra is the second deal to exit. The first was Emerald Infrastructure Development Fund which was a total loss ($1M) of capital for NYCERS.

On December 9, 2011, I asked NYCERS, under the NYS freedom of information law, for the cash flow history between NYCERS and Allegra during the life of the partnership. On July 2, 2012, seven months later, NYCERS notified me that the Comptroller’s office had the cash flow history. I have to assume NYCERS did not have the information even though NYCERS did not specifically say that the agency did not have it.

On July 9, 2012, I requested the information from the Comptroller’s office. I was told it would be sent on August 20, 2012, a six week delay. That is not bad for a FOIL request and I actually received the information on August 20, 2012.

The response, however, was a bit strange. Let me quote the wording of the Comptroller’s email:

“The cash flows below have been provided by the Stepstone Group LLC, the Private Equity consultant to NYCERS.” 

This is troubling since this implies that the Comptroller’s office does not have this information in its own files. This would mean that neither NYCERS nor the Comptroller records what money is moving between NYCERS bank accounts and the private equity managers. 

I suspect that each private equity manager has a blanket approval to draw down against NYCERS bank accounts up to a fixed maximum limit set by contract. It would appear that the only way that the consultant would have this information is from the private equity manager since the Comptroller does not have it.

Bottom line, the private equity managers have direct access to NYCERS bank accounts without NYCERS disbursement authorization and without notification to NYCERS or the Comptroller.  

There is a very specific requirement in the NYCERS section of the NYC Administrative Code. It states as follows:

 “ §  13-137  Payments  from funds. All payments from such funds shall be made by such comptroller upon a voucher signed by the executive director  of the retirement system.”.
It is true that modern investing requires managers to move quickly before a voucher can be processed. All other investment actions, however,  are subsequently reported to NYCERS and the necessary vouchers are produced. This allows NYCERS to keep accounting control of its assets. Of course, private equity investing is not high frequency trading and a 24 hour approval cycle would be reasonable for disbursements to private equity managers.

Legally, NYCERS is responsible for the proper accounting of its assets, not the Comptroller and not a third party private firm.  In addition, as of June 30, 2011, Stepstone was not under contract to NYCERS. Assuming they  began working for NYCERS in FY-2012 any information they have is dependent on work that was done by another contractor, Pacific Corporate Group, over  the last twelve years. 

The cash flows reported may be totally accurate but it is not possible to confirm their accuracy. I don’t know any prudent person who would turn over his check book to a third party.

Now let’s look at the really bad news. With cash flow information provided, the Allegra investment had a rate of return equal to negative 8.24% per year over eleven years. This is equal to a steady loss of  8.24% for 11 years in a row, not just a bad quarter or a year.

NYCERS invested $24M and got back $11.66M. 

On top of the loss of accounting control this was a disastrous investment for NYCERS. As I said before NYCERS has about 150 private equity deals in play. The law of averages projects that NYCERS will break even on these deals, if it’s lucky. It definitely will pay huge annual fees.

This is clearly an imprudent investment strategy for a large pension fund. Heck, it’s a bad strategy for anyone.

For some strange reason the Comptroller is still carrying Allegra on his NYCERS quarterly reports as of March 31, 2012 at a value of $4.74M. This makes you question the accuracy of the quarterly reports.


jeremy said...

What big loss on their part. It is probably one effect of the crisis they had.

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