Blackstone Defends Pension Agents Amid SEC Crackdown

(Bloomberg) -- Middlemen who lobby public pensions for private-equity and hedge funds are fighting efforts to ban placement agents by arguing that the scandal engulfing their business will cull influence peddlers.

“What’s going on in the short term is important and something we have to respond to,” said Joseph Herman, a senior management principal for Park Hill Group, which provides such services as a unit of Blackstone Group LP, the world’s biggest private-equity company. “It’s going to clean out people who aren’t qualified and the cause of the problem.”

Herman said he is part of a coalition that’s advocating the value of placement agents to state treasurers. New York Attorney General Andrew Cuomo said he is probing influence peddling, kickbacks and unregistered brokers in the industry and has issued more than 100 subpoenas. The U.S. Securities and Exchange Commission also is investigating.

“Groups like Park Hill are going to be in a great position” once industry practices are improved because the firms will be poised to gain a bigger share of the business, Herman said in an interview. He spoke last week while attending a New York conference for private-equity firms on raising capital during the worst recession since the Great Depression.

The pool of pension assets available for middlemen to chase is shrinking. Public and private retirement-fund assets totaled $10.4 trillion at the end of 2006, according to the latest annual report on institutional-investor assets by the Conference Board, a New York research group.

Shrinking Assets

The Standard & Poor’s 500 Index of U.S. stocks has since fallen 36 percent. Census Bureau data published April 30 show that state and local public pension assets fell to $2.23 trillion at the end of 2008, a 24 percent decline from 2007 and the lowest since the third quarter of 2004.

Some pensions are moving to restrict middlemen. New York state and city have banned the use of paid intermediaries by money managers seeking slices of their pension funds, with assets of $122 billion and more than $30 billion, respectively. New Mexico Governor Bill Richardson has ordered his state’s investment council to do likewise.

North Carolina’s state pension is preparing rules for placement agents to prevent abuses.

“We’re in the process of developing a formal policy, given all the activity,” state Treasurer Janet Cowell, who oversees $60 billion in pension investments, said in a May 8 interview. “It’s been our informal practice that placement agents must be disclosed, and we’re trying to formalize that.”

Disclosing Middlemen

The California Public Employees’ Retirement System, the largest U.S. public pension, also is moving to require investment firms to disclose payments to middlemen.

“Those who are called placement agents today in a year are going to be divided into three groups: legitimate investment bankers, lobbyists and bad guys,” Steve Robling, managing director of New York-based placement agency Liati Group LLC, said in an interview. “A good placement agent, like a good investment banker, knows what someone would invest in and tries to identify the highest quality product in the asset class for that person.”

Scrutiny of the industry intensified March 19, when Cuomo and the SEC filed criminal and civil complaints against Henry “Hank” Morris, former New York Comptroller Alan Hevesi’s political adviser, and Deputy Comptroller David Loglisci.

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