Friday, January 30, 2015

A Further Flaw: Charles Baker’s New Jersey Campaign Contribution was Legal

A Further Flaw: Charles Baker’s New Jersey Campaign Contribution was Legal

In my post earlier this morning, I noted that New Jersey’s auditor decided that Governor’s Baker’s campaign contribution didn’t violate the law because Mr. Baker wasn’t involved in managing the relevant fund.  When I went back to David Sirota’s original reporting on this story[1], I was reminded that Mr. Baker worked on portfolio companies owned by the fund (VI) that New Jersey invested in.  In other words, the auditor’s opinion is on even weaker ground than I suggested.


A Convenient Opinion: Charles Baker’s New Jersey Campaign Contribution was Legal

A Convenient Opinion:  Charles Baker’s New Jersey Campaign Contribution was Legal

An auditor for the State Treasurer of New Jersey issued a long awaited report concerning a $10,000 campaign contribution by Massachusetts Governor Charles Baker to the State Republican Committee in New Jersey.[1]  Before becoming Governor, Mr. Baker had been an operating partner for General Catalyst, a venture capital firm that won a mandate from New Jersey’s public pension plan.  New Jersey has a law that prohibits employees of its money managers from making campaign contributions within two years of soliciting and winning a mandate.  The auditor has concluded that the contribution was not a violation of New Jersey’s law.

In my view, the auditor may have reached the right conclusion but for a completely wrong reason.  In addition, the entire process of resolving this issue has further undermined the integrity of New Jersey’s public pension.

The auditor opined that Mr. Baker’s contribution didn’t violate the law because he was not involved in the specific General Catalyst fund that New Jersey’s pension plan had invested in.  This is a convenient theory, but it is totally inconsistent with the plain language of New Jersey’s statute.  The statute refers to investments made by any investment professional of an investment firm.[2]  The auditor has created a huge loophole, which will enable money management firms to make contributions to New Jersey’s governor so long as the contributor isn’t involved in the specific fund invested in by the pension plan.  Large private equity firms and hedge funds will have no problem meeting this standard.

The auditor would have been on more solid ground if he had ruled that Mr. Baker wasn’t an investment management professional.  While Baker used a partnership title on his business card, he appears to have been an executive-in-residence at General Catalyst, rather than an economic partner. Mr. Baker was a health care executive who sat on boards and provided industry expertise.  In other words, he wasn’t involved in actually acquiring companies, managing any fund, or managing General Catalyst.

The auditor’s ill-conceived opinion may be the result of New Jersey’s deeply flawed process in dealing with this matter.  Rather than awaiting the auditor’s decision on the legality of Mr. Baker’s contribution, New Jersey sold the investment to Washington University’s endowment.  I suppose this hasty decision was intended to clear the air.  However, it made matters worse.  By selling, New Jersey was implying that the contribution was illegal without formally admitting it.  Although the facts in the matter were clear, New Jersey postposed the decision on the legality of Mr. Baker’s campaign contribution until after Election Day.

Apparently the General Catalyst fund was performing well.  While New Jersey may have made a profit by selling the investment to Washington University, it gave up some of the remaining profits on unrealized investment. In short, the beneficiaries of the plan gave up a perfectly good investment for political reasons.

With the election out of the way and Mr. Baker elected as Governor of Massachusetts, I am sure New Jersey politicians were trying to avoid a finding of illegality and were trying to set a precedent that wouldn’t hinder their fund-raising efforts in the future.  Clearly, the auditor’s decision meets the needs of the politicians.  However, it is a poorly reasoned decision that further undermines any confidence the citizens of New Jersey or the beneficiaries ought to have in the stewards of those pension plans.

[2] N.J.A.C. 17:16-4.3(2).

Thursday, January 29, 2015

TPG Sues a Former Employee: A Potential Window into Private Equity

TPG Sues a Former Employee: A Potential Window into Private Equity

Lawsuits are one of the best ways of getting a look inside private equity firms.  I expect an emerging dispute between TPG and Adam Levine, former managing director for global affairs, may provide us with some insights into the business affairs of TPG.[1]  Early in January TPG acknowledged Mr. Levine’s departure. In fact, it looked like Mr. Levine had resigned because he said he was leaving TPG to go back into politics.[2]  He had been assistant White House press secretary for President George W. Bush. 

It turns out Mr. Levine’s departure was acrimonious. TPG has sued Mr. Levine in Federal District Court (N.D.-Tex.) for attempting to extort money from TPG and leaking confidential material to the press, including The New York Times.  According to the complaint, Mr. Levine has also refused to return his laptop and mobile phone.  TPG claims that Mr. Levine is upset because he did not receive a promotion and has threatened that “he would take down the company the same way he took down Lewis “Scooter” Libby” unless TPG pays him millions of dollars.  As assistant White House press secretary, Mr. Levine testified about the press leak involving Valerie Plame, a CIA officer.

For his part, Mr. Levine insists that he is a whistleblower.  According to a spokesperson for Mr. Levine, he tried to warn TPG of “serious issues of noncompliance and defrauding its investors of millions of dollars in fees and expenses.”[3]

Back on January 5th The New York Times ran a story citing confidential sources that alleging that one of TPG’s partners was both collecting his compensation from the firm while also being paid by Chobani, one of its portfolio companies.[4]  Fortune countered the Times claim.  They report that the TPG executive hasn’t collected any remuneration from Chobani.  I’m not sure if the Times story is what TPG is referring to when it alleges that Mr. Levine leaked documents.[5]

TPG is an extremely powerful player in private equity and politics.  I suspect their lawsuit is designed to bring Mr. Levine to heel.  With $65 billion in assets under management, TPG can make it extremely expensive for Mr. Levine to defend himself.  As a result, this matter may be settled in the coming days.  However, if Mr. Levine decides to fight, we might learn a few things about private equity that the industry doesn’t want us to know. 

Wednesday, January 28, 2015

Nothing to Apologize For: The Blizzard that Didn’t Hit NYC

Nothing to Apologize For:  The Blizzard that Didn’t Hit NYC

From the headlines in the New York Post to commenters on the New York Times website, the conclusion is clear:  meteorologists blew their forecast.  And, bowing to public pressure, many commercial weather forecasters are apologizing to New Yorkers.  In fact, most of the comments and analysis are wrong.  The National Weather Service nailed this forecast about as accurately as science will allow.  True, the storm didn’t take dead aim at New York City and Westchester County.  However, the meteorologists correctly predicted that a low-pressure system cruising across the upper Midwest would merge with another low-pressure system that had yet to form in the Atlantic Ocean and then barrel up the east coast.  As it turned out the storm track was 50 miles or so further east than expected.

Governor Cuomo and Mayor DiBlasio acted appropriately, and both the forecast and the actual storm vindicate their decision.  The governor and the mayor did what former Governor Blanco of Louisiana and former-Mayor Nagin of New Orleans failed to do: they took decisive action based on science to protect their citizens from a potential dangerous storm.  I know shutting down the subway and highways is a massive inconvenience.  However, modern meteorology is accurate enough to warrant taking public action.  I suppose we could adopt the policy of only taking action when a forecast turns out to be accurate, even though that would be absurd.

There’s an investment lesson in all of this.  Money managers and economists have a far poorer track record in making forecasts than weather forecasters.  While weather systems are complex, they are more amenable to science and modeling than economies or financial markets.  Nonetheless, financial experts are continually plying us with forecasts that are wrong more often than they are right.  For some reason, we’re inclined to deride weather forecasters and even ignore their prognostications after one of their predictions fails to be entirely accurate.  When the next blizzard warnings goes up in New York City, a lot of people will probably ignore the warning.  Even though financial experts make incorrect predictions on a daily basis, we still seek their advice and keep our money under their care.  Go figure.

Tuesday, January 27, 2015

Repackaged Social Investing Brought to Us by David Brooks

Repackaged Social Investing Brought to Us by David Brooks

This morning David Brooks extols the virtues of impact investing, which involves forming a fund or business venture designed to achieve a social good while pursuing a modest profit.[1]  Mr. Brooks sees impact investing as a way to address social ills in era of gridlocked government and corporate greed.  He acknowledges that impact investing isn’t raising nearly enough capital ($40 billion) to make an appreciable difference.  However, Mr. Brooks predicts that impact investing is going to start drawing much more attention and capital.  I laud investors who are interested in funding socially progressive products and services.  However, it isn’t a panacea, it isn’t new, and it is going to be co-opted by Wall Street. 

Impact investing is simply a new label on a very old practice.  All sorts of community organizations, companies, and investors have been funding products and services through low interest loans and subsidies for decades.  Mr. Brooks misses this point because he makes an incorrect assertion at the outset of his column.  He asserts that socially responsible investing is only a negative process in which investors try to avoid certain kinds of investments, such as tobacco, gambling, alcohol, or petroleum companies.   Socially responsible investors, including religious organizations, unions, public funds, and foundations have been doing impact investing under the label of social investing for decades.

Only one thing has changed.  Wall Street has put a new label on the effort, and Goldman Sachs, Credit Suisse, Merrill Lynch, and other banks are using this repackaged form of social investing to soothe the consciences of young employees and woo new clients.  Again, there’s nothing wrong with an investment bank offering a client an opportunity to earn an investment return while doing a little bit of good.  However, let’s be clear about what is going on.  The big banks already use their charitable efforts to improve their images.  Impact investing is another weapon in their public relations battle plan. 

In my estimation, it won’t take long for Wall Street to co-opt impact investing into activities that serve Wall Street instead of broader interests.  It’s easy to see the social good that can come from funding research into vaccines or therapies for relatively rare diseases.  However in the hands of Wall Street, impact investing will soon venture into areas where the social good is less clear-cut.  It’s not hard to imagine a fund dedicated to charter schools or fracking in which investors accept below market returns in return for “reforming education” or “promoting greener energy.” 

I hate to be so cynical.  However, when culturally corrupt organizations put new labels on old ideas, cynicism is warranted.  Wall Street has helped to undermine the very political and regulatory institutions that should be working in the public interest.  Mr. Brooks expects impact investing, largely promoted by Wall Street, to fill at least some of the void.  It ain’t going to happen.