Tuesday, September 23, 2014

Another Case of Not Making the Case Against the New Jersey Pension

Another Case of Not Making the Case Against the New Jersey Pension

Yesterday I came across the following headline, “Christie's Pension Overseer Invested New Jersey Money In Fund He Is Linked To Privately.”[1]   Once again, David Sirota of International Business Times is digging through regulatory filings.  Robert Grady is chairman of the New Jersey Investment Council and managing director of Cheyenne Capital.  The Council has approved a series of large investments in Blackstone Group, including one investment in which Cheyenne is also an investor.  Mr. Sirota tries to make case that the common investment and Mr. Grady’s decision not to recuse himself from the vote is part of a simmering scandal.  New Jersey’s pensions face serious problems, and their whole-hearted commitment to alternatives isn’t helping matters.  However, Mr. Grady’s relationship with Blackstone isn’t central to NJ’s problems.

The New Jersey Investment Council consists of 16 members.  According to the law, “at least seven of the nine gubernatorial appointments shall be qualified by training and experience in the direct management, analysis, supervision or investments of assets, which training and experience shall have been acquired through academic training and/or actual employment in those fields.”[2]  In other words, the statute mandates that a plurality of the trustees will come to their roles with built-in conflicts of interest.   I looked at the background of all of Governor Christie’s appointees, and they all have substantial investment experience.  This means that each trustee has all sorts of relationships with just about any investment firm that might be retained by the pension plan.  Are there potential conflicts of interest? Yes.

In fact, every endowment and foundation in the country uses this exact model of governance and thinks it is a positive for its respective fund.  Whether it’s Harvard University or a small community foundation in Chapel Hill, endowments hope to find well-connect investment professionals who will give them insight into prospective managers and even provide leads into potentially attractive investments.  Moreover, in the world of endowments, Cheyenne’s investment in a Blackstone fund would be considered a major plus instead of problem.

Public pension plans face a major dilemma in providing governance for their pension assets.  If experienced professionals are excluded from the pool of potential trustees, public pensions either wind up with a sole fiduciary or a board composed solely of public employees and retirees (member model) who don’t have the requisite experience to properly evaluate investment managers and strategies.   As we’ve seen in the sole fiduciary and member models at public pension plans scattered across the country, conflict of interest isn’t a stranger. 

As Mr. Sirota points out, Mr. Evans recognized the potential for conflicts of interest when he recused himself from voting on New Jersey’s investments in Carlyle Group’s funds.  Mr. Evans was on the management committee of Carlyle before joining Cheyenne.  Mr. Sirota implies that Mr. Evans should have recused himself from the Blackstone decision as well.  The two situations are completely different.  In the case of Carlyle, Mr. Evans had a direct financial interest in the prospective investment.  Moreover, he also would have to recuse himself if NJ ever wanted to make an investment managed by Cheyenne.  However, he doesn’t have a financial interest in Blackstone; his firm has a limited partnership stake in a Blackstone Fund. 

Mr. Sirota also criticizes Mr. Evans for failing to disclose Cheyenne’s investment in Blackstone.  If Mr. Sirota is worried that Mr. Evans was exercising undue influence in the Blackstone decision, disclosure might have created a real problem.  Had Mr. Evans disclosed Cheyenne’s investment, it might have been a persuasive factor in getting the remainder of the Council to vote for the Blackstone investment.

Mr. Sirota finishes his reporting by throwing out a number of data points. He reports that Mr. Evans is on the board of Stifel Financial, which is a holding in the pension’s equity portfolio.  He then notes that Stifel and Blackstone Capital Partners VI invested in a company ultimately acquired by Stifel.  Mr. Sirota also notes that some Stifel executives made a campaign contribution to the NJ Republican party.  If you read these statements  quickly, you might conclude that there’s some kind of improper relationship between Stifel and Blackstone through Mr. Evans.    However, when you slow down and dissect them, the data fails to reveal any meaningful information. Thus, I doubt there’s anything to Mr. Sirota’s contention. 

Stifel is merely one of hundreds of public equities internally managed by NJ’s Investment Division.  New Jersey’s equities are run more or less as an extremely low cost index.  In short, neither Mr. Evans nor the Investment Council made any kind of decision to approve or direct an investment in Stifel.    In addition, Stifel’s political contributions are likely part of a random pattern of political activity by thousands of executives at public companies in New Jersey’s vast stable of holdings. Blackstone’s joint investment with Stifel is an interesting fact, but it doesn’t prove anything concerning Mr. Evans. 

I think the Christie Administration has done a terrible job of managing New Jersey’s public pensions.  Moreover, I don’t doubt that the governor and his political advisors see advantages in cultivating relationships with big-time money managers.  However, Mr. Sirota has failed to make the case against the governor or Mr. Evans.  I’m sure he’ll keep trying, and I hope he finds some actual evidence.

[1] http://www.ibtimes.com/christies-pension-overseer-invested-new-jersey-money-fund-he-linked-privately-1692575
[2] N.J.S.A. 52:18A-83

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