Spotlight on 'Placement Agents' Throws New Light on Fee Racket
New criminal indictments arising from the state of New York's widening investigation into bribes and kickbacks paid to investment funds in return for pension fund investments is throwing a spotlight on the use of "placement agents" to siphon employee pension fund money into private equity deals.
The "placement agents" serve as recruiting agents for the private equity funds, in return for which they receive a hefty fee, which can be a flat percentage or a combination of fee and performance. The fee can range from 1-2% on the money they bring in, and/or 20-35% of the fees the funds charge investors. Touting access to pension funds is one of the key points the agents flog to sell their services to investment fund managers. And the hefty "placement fees" of course kick in before the funds can calculate eventual "carried interest" on the profit - fleecing workers twice on the placement alone!
The Wall Street Journal defines their role as performing "a variety of client services, such as crafting marketing materials and investor presentations -- or making introductions -- to help firms win coveted business that generates significant fees." As the buyout business has come under growing pressure to deliver the returns pension funds had been led to expect, the use of the agents has increased. "Use of placement agents has risen in recent years, as the hedge-fund and private-equity industries have grown. At the same time, declining profits and an exodus of investors amid the downturn has put pressure on firms to raise money, which can generate more business for placement agents. More than half of private-equity firms globally, or about 54%, used placement agents to close funds last year, compared to 40% in 2006, according to London-based research firm Preqin Ltd."
Carlyle Group is the largest and best know private equity fund to have been publicly named in the course of the investigation, which originally sought to determine whether some two dozen funds violated securities laws (in essence taking illegal kickbacks) in exchange for access to the New York City Employees Retirement System (NYCERS). NYCERS has investments with no less than 94 different buyout funeds – USD 1.9 billion of USD 30 billion in total investments.
According to its former executive director John Murphy, "NYCERS is in the dark as to what these investments are worth [today]." It goes without saying that they're worth a fraction of their notional value only a year ago.
New York State has now banned placement agents from access to state employees' pension funds. Meanwhile, the number of funds under investigation and the geographical scope are widening.