Wednesday, October 22, 2014

The King of all Redactions: Carousel Capital

The King of all Redactions: Carousel Capital

The North Carolina pension plan is the sole investor in an entity called the Innovation Fund, and which is managed by Grosvenor Capital.  The $230 million fund is designed to make direct investments in North Carolina as well as investments in private equity funds with a southeastern regional focus.  As I’ve written before, the Innovation Fund is a black hole.  Investment returns, fees, and deal terms that might have been disclosed to the public if the pension had invested directly are hidden because they’ve been made inside the Innovation Fund, which is guarded by Grosvenor. Credit Suisse, the global investment bank, originally managed the fund.  However, Credit Suisse sold its private equity fund-of-funds business to Grosvenor in 2014.

David Sirota of the International Business Times is continuing to explore the curious relationship between the North Carolina pension plan, Credit Suisse, and Carousel Capital, one of the managers for both the state pension plan and the Innovation Fund.[1]  Mr. Sirota has unearthed a very curious fact.  When Carousel Capital set out to raise its 4th fund, it engaged Credit Suisse’s private placement business to help it raise the capital.  As Mr. Sirota points out, North Carolina already had a relationship with Carousel, having committed $21 million to its 3rd fund.  The pension made a commitment to the 4th fund of $25 million, and Credit Suisse made an undisclosed investment in Carousel through the Innovation Fund (it’s not clear if that investment was made into Fund IV or some other entity).  As I’ve written and Mr. Sirota reports, the managers for the Innovation Fund are for the most part incredibly well connected in North Carolina business and political circles.[2]

These facts raise a series of troubling questions that have gone largely unanswered.  Why did Carousel engage Credit Suisse to raise its 4th fund, especially when it solicited North Carolina, which was already an investor in the 3rd fund?  Did Credit Suisse get a commission from Carousel for the Innovation Fund’s investment in Carousel? I’m having difficulty understanding why Carousel needed a placement agent.  They weren’t raising a substantially larger fund.  Their historical performance was good.    

According to SEC filings, Carousel paid Credit Suisse about $2.1 million in commissions to help raise about $300 million in new capital during the same period when the North Carolina pension was paying Credit Suisse about $1.7 million per year to manage the Innovation Fund.  According to Mr. Sirota’s reporting, the Treasurer’s office only response was that Credit Suisse assured them that its placement agent and fund-of-funds units hadn’t talked to one another.  That’s not very reassuring.

As I’ve written before, in responding to SEANC’s public records request, Grosvenor made expansive claims in redacting all pertinent terms of their relationship with the state pension.  So if you’re trying to understand the relationship between the pension plan and the Innovation Fund, you are left with heavily redacted documents and no answers.

However, Carousel Capital is the king of redactions.  In responding to SEANC’s public records request, William T. Hobbs, a managing director at Carousel, made an even broader set of claims than Grosvenor in shielding Carousel’s documents from public view.  At the bottom of this post, I’ve included a page from the private placement memorandum for Fund IV. Only about two out of 103 pages have any text.  The rest is blacked out.  Ironically one of the only sections that is not redacted contains Erskine Bowles’ resume.  Although Mr. Bowles claims that he doesn’t have anything to do with the management of Carousel, his c.v. remains one of  eight listed in the document.  All the other legal documents pertaining to Carousel’s relationship with North Carolina, including side letters, amendments, and subscription agreements, are similarly redacted.  Before these documents were released, lawyers in the Treasurer’s office reviewed them.  It’s disappointing that these officials didn’t counter the ridiculous disclosure exemptions claimed by Carousel and Grosvenor. 

As a result, we’re left with troubling questions about the operation, performance, and expenses of the Innovation Fund, as well as the relationship between the State Treasurer, Credit Suisse (Grosvenor), and Carousel.  The pension’s beneficiaries and taxpayers deserve answers.

[2] see, “Drawing the Wrong Inference:  In-state Investing in NC,” September 2, 2014.

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