Sunday, June 7, 2009

Florida Unwilling to Compile 130 Side Letters

The state of Florida invested billions in public retirement funds with private equity underwriters (PEU's). Politically connected people made millions in placement fees. The Carlyle Group settled with New York Attorney General Andrew Cuomo for $20 million. It came with no admission of liability.

Florida's State Board of Administration invested funds with PEU's, using side letters to detail aspects of the agreement. The St. Petersburg Times reported:

Florida has invested hundreds of millions of dollars in at least six deals with Carlyle.

The state's "side letters'' could contain the names of placement agents, the intermediaries who private investment managers may have paid to win huge blocks of public pension money.

Placement agents can make 1 to 2 percent of the value of a pension fund investment. So if a state agrees to invest $100 million, the placement agent can make $1 million to $2 million.

When Florida's oversight board met in April, Attorney General Bill McCollum asked SBA executive director Ash Williams if Florida had potential problems.

Williams said no, because when it comes to private deals, Florida requires investment firms to disclose the use of placement agents in the "side letters.''

"To the extent a manager is paying a placement agent, we will not pay those fees,'' Williams said. He stressed that in Florida, things are done "in the sunshine."

Pension funds don't pay placement fees, PEU's do. Sunshine would involve the compilation and releasing of letters. That Florida hasn't and won't, is very concerning.

I smell a PEU with little to no oversight. Funny, those are the Obama administration's regulatory reform plans. Until then, the SEC is on the case.