Thursday, May 15, 2014

Missing the Forest for the Trees: General Catalyst and PandoDaily

Missing the Forest for the Trees: General Catalyst and PandoDaily

PandoDaily is a technology blog that covers all sorts of stories that go well beyond technology. David Sirota, one of its writers, has tried to draw a connection between a campaign contribution to the New Jersey Republican Party and a venture capital mandate won by General Catalyst.[1]  In 2011, Charles Baker wrote a $10,000 campaign check.  Mr. Baker was a “partner and executive in residence” at General Catalyst.  Seven months later, the New Jersey Treasury Department made a commitment to General Catalyst’s 6th fund.  By 2013, General Catalyst VI had made investments in a couple of companies on which Mr. Baker served as a board member.  Mr. Baker is running for Governor of Massachusetts.

Mr. Sirota is claiming that the $10,000 campaign contribution was a quid pro quo for getting the investment commitment from the New Jersey pension, and that the money was then funneled into businesses controlled by Mr. Baker.  Apparently the Democrats are already running attack ads using this bit of reporting.[2]  In his eagerness to find a scandal, Mr. Sirota has overplayed the story and completely missed the much bigger picture.

Mr. Sirota is right to question whether the campaign contribution might have violated New Jersey’s prohibition[3] or the SEC’s limitation[4] on campaign contributions by money managers.  While Mr. Baker’s business card carried the exalted title of partner and executive-in-residence, it isn’t clear if he was employee of General Catalyst or merely a consultant.  Many private equity firms give operating executives fancy titles in order to impress investors but use them as consultants to evaluate prospective investments, sit on boards, or run portfolio companies.  So it’s possible that Mr. Baker’s contribution didn’t violate New Jersey’s rules.  As you’d expect, General Catalyst denies any wrong doing.

The SEC’s rule might also prove problematic for General Catalyst if Mr. Baker was a “covered person” under the rule.  Importantly, Mr. Baker’s campaign contribution is perfectly permissible under the SEC’s rule.   The penalty would fall on General Catalyst, which would have to forego two years of management fees.

While I think there is a possible violation of one or both rules, I am skeptical about the connection between the contribution and the mandate.  My guess is that the campaign contribution to the New Jersey GOP was about Mr. Baker’s political ambitions and not General Catalyst’s interest in managing money for the pension.  Mr. Baker was probably trying to build an alliance with Governor Christie.  Moreover, Mr. Baker’s contribution is tiny compared to the kind of money doled out by David Fialkow and Joel Cutler, the co-founders of Catalyst.  Since 2010, the two executives have donated $236,000 to national elections, and their families (as best I can tell) have donated another $254,000.[5]  While none of that money was donated in New Jersey, Mr. Fialkow is a major donor to the Republican Party, and Mr. Cutler plays the same role in the Democratic Party.  Both men will cross party lines from time-to-time and appear to be supporting Mr. Baker’s campaign efforts.

As I’ve argued many times, the real political influence involved in public fund investing is far too subtle to be captured by New Jersey’s or the SEC’s rules.  Everyone involved in investments and politics knows that Fialkow and Cutler are politically well connected.  They have no need to make campaign contributions in New Jersey.[6]

Mr. Sirota might do well to take a look at the campaign activities of the investors who support PandoDaily.[7]  I recognize a number of politically active money managers on that list.  Singling out Mr. Baker is a great way to spark outrage, but it doesn’t get at the more pervasive problem of influence in pension investments.

Mr. Sirota claims that there’s something wrong because capital was invested in companies on which Mr. Baker served as a board member.  There’s absolutely nothing wrong with this part of the picture.  General Catalyst’s LPs would have reason to complain if Fund VI hadn’t invested in companies in which Mr. Baker plays a role.  After all, investors were probably told that Mr. Baker knows a thing or two about managing companies and health care.

Mr. Baker’s role as an executive-in-residence raises an interesting question about how he was compensated.  Andrew Bowden, the Director of the Office of Compliance Inspections and Examinations, pointed out in a recent speech that some private equity firms charge consulting expenses to their funds or portfolio companies when they should be expenses of the firm.[8]  Clearly, General Catalyst thought there was a business advantage to presenting Mr. Baker as a partner.   We don’t know whether General Catalyst paid for this service or placed the cost on their LPs. Mr. Sirota might want to find out.

[3] New Jersey Administrative Code, 17:16, subchapter 4
[4] 17 CFR Part 275, 206(4)-5.  See,, page 47.
[6] Both men have made contributions to the Rhode Island Treasurer, Massachusetts Governor and Treasurer.  They do not have an investment relationship with the pension plan in either state.
[7] See, at the bottom of the page.

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