May 15, 2016
By Joe Distefano

It adds up: Pennsylvania paid more than $600 million in fees to hundreds of private firms managing money for its state and school pension systems in 2015.

Plus more in submanager fees, and profits that hedge funds and real estate managers pocket at liquidation of their investments, which the pension systems don’t count.

The fees that the state pension systems reported total more than the investment profits the funds collected last year, a tough one for investors.

Maybe it’s not surprising, then, that professional money managers so often split these fees with the guides who promise to help them land government investment contracts.

“Placement agents” help private money management firms get hired by pension funds and others. Funds also hire advisers to help decide which firms to hire.

This field attracts sports celebrities. Retired Phillies pitcher Larry Christenson and Steelers receiver Lynn Swann have each founded placement agent firms that helped money managers sign public pension clients. Former Eagles tight end John Spagnola advises public pension funds and others on which managers to hire.

How is the work done? “We can’t write a political check,” Christenson told me. But “we can be supportive of a scholarship fund that may be important to people in a community where a client wants business.”

The big money in this business is on Wall Street. Credit Suisse, UBS, and Merrill Lynch operate some of the biggest placement-agent shops.

Paul J. Taubman, head of the second-largest operator, PJT Partners, collected $164 million in stock grants and cash last year, making him the highest-paid chief executive on Wall Street, according to the Bloomberg Pay Index.

PJT subsidiary Park Hill Group’s agents represented funds hired by both the Pennsylvania State Employees’ Retirement System and the Public School Employees’ Retirement System last year.

The industry has a sometimes embarrassing history. New York state Treasurer Alan Hevesi was sentenced to prison in 2010 for taking $1 million in bribes from a placement agent, whose client got $250 million in state money to invest.

Other pension pay-to-play scandals tarred professionals in California, Kentucky, and New Mexico. Pennsylvania Treasurer Rob McCord’s attempted-extortion conviction last year was followed by revelations that he helped prosecutors by secretly recording conversations with a placement agent seeking state investments. The agent has not been charged.

In March, one of Taubman’s placement agents, Andrew W.W. Caspersen, a Harvard Law School graduate who focused on helping real estate funds get hired, was charged with criminal fraud in New York for allegedly bilking a client out of $25 million for phony investments. Caspersen was fired and is fighting the charges.

In the race to succeed McCord, placement agents are an issue. “We need an immediate ban on third-party marketers,” says Joe Torsella, the Democratic candidate.

He also wants to publicly disclose state pension manager contracts public, and force managers to disclose political contributions. (I hope he’ll flag their federal contributions, which is where the action is, since a 2010 law banned money managers from collecting state and local investment fees if they give to state and local candidates.)

Torsella has provoked a defensive reaction from the placement agents’ lobby. He’s “misguided,” says Donna DiMaria, chair of the Third Party Marketers Association.

She says Dick Ireland, the placement agent whose conversations with McCord were recorded, isn’t registered with the SEC or the FINRA self-regulatory agency. So you can’t blame the system for what happened there, she said.

What is the agents’ impact on pension funds and the taxpayers who finance them?

In a paper last year, a team including SEC economist Matthew D. Cain found that funds hired with help from placement agents typically earn their client pension funds a few percent less than investors who don’t use agents.

“It is difficult to reconcile these results with the notion of broad value creation by placement agents,” they noted.

Among the top 20 investors in private equity funds, which include both SERS and PSERS, the average fund that pays a placement agent produces returns more than 3 percent below investors who didn’t pay placement agents. So it’s not surprising agents’ pay “is often not directly exposed to fund performance.”

The one pension system where investors with placement agents outperformed those with no agent – by less than 1 percent, not enough to be statistically significant – was PSERS, where 97 of the 259 outside managers hired placement agents, a higher proportion than at other funds.

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