"Zombie" Private Equity Funds

I just came across the following "Pensions & Investments" article from its January 9, 2012 issue concerning failing private equity deals that refuse to die. They just keep on collecting their fees.

The article actually mentions the NYC pension pension funds as having to deal with this problem.

I wonder how many zombies the NYCERS trustees are dealing with in their secret executive board meetings? Well, at least one zombie died.

As of June 30, 2011 NYCERS had entered into 140 private equity contracts with 100 managers. In its FY-2011 CAFR, NYCERS failed to report the annual fees for 27 of those contracts. The total fees for the private equity contracts was reported at $41.94M. That amount is overstated because six non private equity managers were included in the list of private equity managers. The amount to be subtracted is $7.72M.

Of course, in addition there is the $26.60M charge for private equity that NYCERS is unable to identify who are the parties receiving the payments. It's like your wife telling you that she spent $29M shopping but she can't remember what she bought.

This whole program is an accounting shambles. Private equity firms generally want to hide everything they are doing. Public pension plans are required to be transparent to prevent fraud. Guess who wins out?

We are all going to learn a great deal about private equity firms because of Mitt Rommney and Bain. Pay attention. Even when they make money, they are very often putting workers out on the street.

Hard Reality of Private Equity

At the NYCERS investment board meeting on September 16, 2011, the NYCERS private equity (PE) consultant, Pacific Corporate Group (PCG), notified the trustees that one of its PE investments, Allegra Capital Partners IV, had exited during the first quarter of 2011. See the Wikipedia quote below:

A private equity fund's ultimate goal is to sell or exit its investments in portfolio companies for a return, known as internal rate of return (IRR) in excess of the price paid. These exit scenarios historically have been an IPO of the portfolio company or a sale of the company to a strategic acquirer through a merger or acquisition (M&A), also known as a trade sale. Increasingly, more common has been a sale of the portfolio company to another private equity firm, also known as a secondary sale. In prior years, another exit strategy has been a preferred dividend by the portfolio company to the private equity fund to repay the capital investment, sometimes financed with additional debt.

I have previously commented on the problems of PE investments for public pension funds.

PCG stated that this is the second NYCERS PE investment to exit since the PE program was started in 1999. I suspect that the first PE investment to exit was the Emerald Infr. Dev. Fund. It was a disaster with a total loss of capital equal to $1M and fees for two years (2009 & 2010) equal to $754,338.

PCG did not give the trustees any specifics on the close out of the 12 year old Allegra partnership. But from the PE investment recap you can extract some of the bad news. NYCERS invested $24M in this partnership and received back $11.7M. That is a 51% loss of capital and obviously, a negative IRR.

To rub salt in the wound, NYCERS paid Allegra $2.2M in fees from 2000 to 2010. The fees may be even higher. Since 2005, there are four years with missing fee data. I left NYCERS in 2005.

PCG is reporting a -9.2% IRR for these two exited PE investments. PCG, however, provides no documentation supporting this number.

The only way to calculate an accurate value of a PE investment’s IRR is with the full cash flow history for the partnership. NYCERS members and retirees are entitled to this history. They have the right to a public reckoning of all investments.

When it comes to accurate data, there is a high flight risk with any PE investment. In addition, I have a strong suspicion that NYCERS has been derelict in its responsibility to seek and maintain the necessary information to protect the funds it placed with PE managers.

What do you get for $2.9M?

A notice in the October 31, 2011 issue of the City Record indicated that NYCERS had award a contract to the Caudwell Wingate Company, LLC for the demolition and build-out of a disaster recovery site. The amount of the award was $2,897,271. This was a negotiated acquisition.

There is a problem with this contract. NYCERS does not have a budget authorization for this $2.9M item in its FY-2012 budget. The trustees will need to modify the FY-2012 budget to cover this expense. As of now, the NYCERS executive director does not have the authority to sign this contract unless the trustees have authorized the funds needed to pay for it.

What is NYCERS supposed to be getting for this $2.9M? In April of this year, the NYCERS legal department described the work as follows: “ to include but not limited to demolition of existing walls, installation of walls, HVAC, lighting, flooring, electrical, millwork, new operable partition wall and sink in pantry”. That must be some sink. This work is being done on a single floor in an old warehouse site where a retail firm used to store some of its inventory. In passing, it appears that the NYCERS legal department has been reassigned to procurement and site management.

When is this project going to be completed? Mañana.

Who is Caudwell Wingate and what are their political connections? This week the NY Times had an interesting story about a boiler installation contract at the new Yankee Stadium.

Considering that NYCERS signed the lease for the disaster recovery site in L.I.C. in 2006 and it is still not yet operational, the trustees should be closely monitoring everything involved with this project.

Everyone is screaming about a pension crisis. This is the type of management failure that causes a crisis.

The Mayor and the New Pension Investment Board

At the NYCERS investment meeting on Tuesday, 11/15/2011, Liu's first deputy comptroller, Mr. Eric Eve, had to sit and take a pounding from the NYCERS trustees who were left out in the cold about the 10/27/2011 press release announcing the "proposal" for a new pension investment board. The press release was lead by the mayor with the comptroller in tow.

So why was everyone throwing verbal rocks at Eric Eve while Ms. Ranji Nagaswami, the mayor's appointed NYCERS trustee, sat comfortably at the head of the table? You would think that the mayor had nothing to do with trying to cut two major unions, the Public Advocate, and the five borough presidents out of the the investment decision process at NYCERS.

How did Bloomberg dump this pile of garbage in Liu's lap and walk away with clean hands?

Of course, Mr. Eve did not give any specific details of the how this new board would be structured and operate. I suspect that is because either he had no details or because any hard details would have pissed the hell out of the trustee who had not been consulted. But I think it's was really equal parts of both. For example, it was very "unprofessional" of him to say that passion was going to be one of the requirements for membership on the new investment board. How do you evaluate passion?

You wonder where elected officials find these staff people.

Chapter 514 - Laws of 2011 - Police & Fire Retirement at Dismissal

Chapter 514 was signed into law on 9/23/2011. It deems a Tier 1 & 2 member of the NYPPF and the FDNYPF with 20 or more years of police or fire service to be retired as of the date he/she is dismissed Failure by the member to give the full 30 day filing notice due to termination will not impair the member’s retirement benefit. This law does not affect new members hired after 6/30/2009 since they are covered by Tier 3.

There is one negative aspect of this new law. There appears to be a pension forfeiture provision for a felony conviction, if a police or fire member avails himself of this exception to the 30 day filing requirement for retirement.

The provision states that a member (this word creates some uncertainty as to whether it applies to a pensioner) with 20 years of service will forfeit his/her retirement benefit if he/she is convicted of a felony in NYS, or an offense either in another state or under federal law that would be a felony in NYS.

Current Tier 1 & 2 police & fire members are generally not subject to this forfeiture since they have grandfather rights prior to 9/23/2011. I suspect, however, the only time the forfeiture issue would arise is when a member used the 30 day exception with his/her deemed retirement at termination.

I am not sure what the pension funds’ will do with respect to future felony convictions for dismissed retirees.

Not Ready for Prime Time - Proposal for Central Investment Board for City Pension Funds

The Proposal

On October 27, 2011 the mayor and the comptroller issued a joint press release. The release announced an agreement in principal to reform investment governance and management of the five city pension funds. Any joint policy initiative by two political rivals is usually a significant event. Six union trustees joined in the announcement.

In the past I have commented on the lunacy and high risk investment decisions which specifically the NYCERS trustees have engaged in since 2000. NYCERS is the largest of the five city pension funds. The NYCERS trustees are established by statute and include the mayor’s representative and the comptroller, the public advocate, the five borough presidents, and three major city unions. There are definitely changes that the pension funds need to make. This proposal, however, misses the mark completely. The tools are already there but no one wants to use them.

As a rationale, the mayor's press release stated:

The proposal is intended to insulate management of pension assets from any political office, further professionalize it and make it more consistent with industry best practices. The proposal aims to increase investment returns, lower the City’s pension costs, protect and strengthen pensions for current and future retirees, enhance accountability and guard against the possibility of fraud and corruption.

Current Investment Authority

The mayor seems to be unaware that the city pension trustees already have the authority and resources to depoliticize the investment process, professionalize the investment staff, and implement "best practices". For the last ten years the mayor has not used that authority. It is significant that he chose Martha Stark be his representative at the pension boards for his first seven years in office.

The five city pension systems currently delegate, on a annual basis, their investment authority to the comptroller (Section 13-702 of the NYC Admin Code). This creates a centralized investment system managed by the comptroller. The comptroller usually hires a CIO who reports to him. The comptroller also has a permanent investment staff within his Bureau of Asset Management (BAM). The five pension systems subsidize the comptroller's operating budget to cover the costs of running these investment operations.

Section 13-702 also permits the trustees of any of the city pension funds to rescind their delegation of the comptroller at anytime. If the trustees are unhappy with interference of political forces in the investment process or the lack of investment performance, they can assume direct responsibility of their own investment process. They can hire necessary support staff. In addition, each of the five city pension already has its own outside investment consultant which the trustees have hired. These consultants could easily provide the expertise needed by the trustees to operate their own investment function.

Loss of Power for the Comptroller

The proposed investment board would clearly accomplish one thing. It will reduce the status of the comptroller in the investment process and impact his ability to raise campaign contributions. From a purely political point of view, political actors never willingly surrender power. There is a funny smell in the air here. It may not be a coincidence that federal authorities are investigating the comptroller's campaign fund raising activities.

Performance

With regards to investment performance no one with any certainty can say that the new investment board will be able to improve performance by 1% or more over the current arrangement. It is just as likely that the new board would produce a 1% drop in performance. This is the standard type of delusional comments you find in marketing propaganda.

Structure of New Board

Who will sit on the new board? It will be particularly difficult determining who will be members of the new board and what the voting structure will be. I can not imagine any trustee not wanting to be on the investment board. So much for a more simple and effective board. It is clear that the Public Advocate and the five borough presidents will want to remain involved. I am sure that the same will be true for all unions currently involved.

There will also be pressure from unions currently not on the boards. I know for a fact the Correction Force and Sanitation Force unions would love to have a seat at the table.

As seen in subsequent news articles, the mayor failed to check with at least seven of the NYCERS trustees, a majority of the NYCERS board. These trustees have made it clear that they have serious questions about the proposal.

Each of the five city pension funds has a distinct financial profile which impacts investment decisions . For example, as of June 30, 2010, the FDNY pension fund was 56% funded and NYCERS was 80% funded, a significant difference. They have different cash flow demands. The funds will continue to be separate accounting entities and trusts. The trustees of each fund are the prime legal fiduciaries of the funds. It will not be possible to remove their responsibility for the investment process of their associated fund assets.

The NYCERS fund, specifically, has other significant participating employers besides the city. In the past OTB was a major participant. There are some really complex issues embedded in these pension systems.

There is no mention in the proposal how this new investment board will be funded. There was no mention of the current civil service of the the existing staff at BAM. Who would approve the investment board's annual operating budget and the fees paid to outside managers? Assets of any of the pension funds can only be disbursed upon the public approval of the associated board of trustees.

Staff for the New Board

There is always a presumption that the compensation for investment staff should be free of government compensation limits. This opinion is tied into what type of investing you want to do. I have expressed my opinion that public pension funds should follow a lower risk/lower cost strategy. This strategy would allow the pension board effectively manage their assets with staff paid within the city pay structure. The 2008 financial crisis taught us all how irresponsible and incompetent highly paid investment professionals can be.

The mayor wants the pension funds to emulate Harvard and Yale. Pension funds are very different from endowment funds in that pension funds must make mandatory annual payouts no matter what the pension fund earns on it investments. Without mandatory payouts, endowments can tolerate higher risk profiles than pension funds. This is where higher compensation might become an issue. But then again, higher risk is not a guarantee of higher return.

The Chief Investment Officer

The proposal envisions a permanent CIO described below:

A Chief Investment Officer will lead the new investment management entity. The Chief Investment Officer will report to the new pension investment board – not to any individual elected official – and will be appointed to a fixed term that will not coincide with citywide election cycles

It will be no easier for the investment board to hire a new CIO than it is for the comptroller . The CIO will clearly be an at-will employee. There will definitely be a certain level of politics associated with the investment board. An truly independent CIO is not logical when the trustees are the fiduciaries of the five pension funds.

The Comptroller's Duties as Custodian and Disbursement Agent

By statute the comptroller is the custodian and the cash disbursement agent for the five pension funds. While the custodian function has been contracted out for many years, the disbursement function means that the comptroller is responsible for the cash management operations for the five pension funds. This separation of control is a very sound arrangement. It is a good accounting practice and guards against fraud. It should not be changed. It should, however, be reinforced. The accounting control of investment management fees is a disaster.

Recap

The more I think about this proposal, the more I am convinced that it is a public relations effort with no connection to reality.

NYC Department of Investigation – Can You Trust DOI?

In the spring of 2009, two and half years ago, I reported to both the Department of Investigation (DOI) and the NYCERS trustees an act of perjury (deliberately giving a false statement under oath) by Felita Baksh (aka Ramsami) during a sworn DOI interview.

In response to my notice, one of the trustees, the former Public Advocate, asked that DOI investigate the matter and report back to the Public Advocate and to me. The Public Advocate was the only party to take any action or acknowledge my allegation. In response, DOI notified the Public Advocate that it was forwarding the matter to the Department of Finance IG for review. DOI did not notify me of this action but the Public Advocate did.

I provided all parties with a copy of the verbatim testimony of the DOI interview of Baksh from July, 2004. The interview was given under oath. In a very careful manner, the DOI interviewers gave Baksh a second chance to correct her original false testimony after warning her that she was under oath. She did not change her testimony. The false testimony related to the help Baksh received from Karen Mazza, a staff attorney at NYCERS, in regards to Baksh’s fraudulent appointment as HR director at NYCERS in 2004.

You might be wondering how DOI managed to miss this almost certain act of perjury during one of its own interviews. In 2004, DOI chose not to make a verbatim transcript from the audio tape of the interview. DOI chose, instead, to allow the lead investigator, Carol DeFreitas, to make a summary from the audio recording of the interview. DeFreitas was not one of the DOI investigators who interviewed Baksh. DOI had put her in charge of the investigation even though she was only a temporary employee recently on loan from Martha Stark. DeFreitas was actually a Department of Finance employee receiving a pay check from Finance and not DOI.

Subsequently, DeFreitas became involved with Mazza in an effort to hide the extent of the help that Mazza gave to Baksh. In addition, Mazza pulled another NYCERS employee, Kin Mak, into the cover up. Mak, an IT staffer, enabled Mazza to hide incriminating emails but not before Mak made copies of all the emails that pertained to the events surrounding the investigation.

Those copies are safely tucked away at Mak’s home in Pennsylvania. Those emails, I suspect, cast a wide net and have crippled the investigation into the Baksh perjury charge because of the people implicated by the emails.

I previously reported all of this in a series of postings: perjury, DOI, and sleeping trustees.

Recently, in response to a FOIL request for DOI’s closing memo for the investigation of the perjury charge, DOI refused to release any information. DOI claims that the information is exempt under FOIL because it would be an “unwarranted invasion of personal privacy” and it was “compiled for law enforcement purposes and would identify a confidential source or reveal confidential information relating to a criminal investigation”.

It is clear that the perjury charge against Baksh is public record. There is no personal privacy to protect in this case. If DOI finds that this public charge is untrue, it should at least clear Baksh’s name. But I am very certain that DOI found the charge to be true. It appears that DOI does not want to deal with the charge and the web of corruption that goes along with it.

The majority of DOI’s work is allegedly for law enforcement purposes. DOI is claiming the closing memo would identify a confidential source. That can’t be it. I publicly supplied them with all the information they need to reach a conclusion on the charge. In addition, after two and half years, I don’t think that there is any criminal investigation going on. It is completely reasonable to conclude that DOI is protecting one or more people.

Unfortunately, DOI has not given a report on the investigation to the Public Advocate or to me.

Even more unfortunately, the current Public Advocate has made no effort to obtain the closing memo from DOI even after being questioned about the investigation.

In closing, the perjury allegation is almost certainly true and therefore, almost certainly the NYCERS trustees are allowing three criminals to continue to work at NYCERS. This raises suspicions about the judgement and integrity of the trustees.