Thursday, April 23, 2015

Political Inoculation: North Carolina’s Treasurer Commits to Another Innovation Fund

Political Inoculation: North Carolina’s Treasurer Commits to Another Innovation Fund

Yesterday North Carolina’s State Treasurer Janet Cowell announced a $250 million commitment to a second fund focused on investments in the state.  Like the first fund, this edition of the North Carolina Innovation Fund will be managed by Grosvenor Capital and will make investments in companies as well state-based private equity funds.  According to Treasurer Cowell, the first fund is doing well with an estimated return thus far of 20%.  This blog post is prompted by a couple of sentences in the News & Observer story about this new fund[1]:

Cowell said politics don’t play a role in the fund because it’s run by an outside manager, Grosvenor.

“They are screening these investments,” she said. “They make decisions. It’s not a factor.”

This fund is all about politics.  Why did Hugh McColl, former Chairman of Bank of America and the founder of Falfurrias (one of the first fund’s underlying managers), attend the press conference?  Why did the treasurer hold a press conference at all?  The pension plan makes far larger commitments all the time, and there are no press conferences or even press releases.  Why did the treasurer mention that the first fund had helped to support 6,200 jobs in the state? 

Ever since the pension plan began to invest in equities over forty years ago, North Carolina’s treasurers have attempted to get some political mileage out of directing a bit of the pension’s assets toward managers and investments in North Carolina.  As I’ve written before, when I was CIO over a decade ago my meeting calendar with filled with meetings with many of the very same people who manage money for the Innovation Fund today.  A couple of those folks eventually received mandates from the pension plan.

Treasurer Cowell has simply created the ideal and most expensive vehicle for improving the political optics of directing investments into North Carolina.  By hiring Grosvenor Capital (originally Credit Suisse), the treasurer has a professional intermediary to screen investments.  If the second fund is set up like the first, Grosvenor will continue to show the treasurer prospective investments before they are made, so she has an opportunity to review and turn down deals.  In other words, the treasurer and the Investment Division have far more involvement in the investment decision-making process than is typical in any other investment fund.

Moreover, by having Grosvenor as the manager, the treasurer is also able to avoid any detailed disclosure over the holdings or performance of the underlying investments.  For example, if the treasurer made a direct investment with Falfurrias, she would have to disclose the size of the pension’s commitment, the performance of the investment, and the fees paid to the firm.  The Innovation Fund makes all of that disclosure go away.  As a result, the state treasurer is free to selectively disclose information that is favorable to her position rather than all the information that would give taxpayers and beneficiaries a clear picture.

In fiscal 2013, Grosvenor (Credit Suisse) was paid $1.6 million for providing these services.  We don’t know what they were paid in 2014, because the Treasurer has yet to issue a detailed fee report.  In the same fiscal year, the salaries for all the members of the Investment Division were also $1.6 million.  In other words, the pension spent about 0.65% to retain Grosvenor to mediate the political ramifications of the Innovation Fund, while spending 0.002% to oversee $80 billion in assets.  There’s something wrong with this picture.

I’ve written extensively on the Innovation Fund. 

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