October 12th, 2010 5:33 pm | by NIGEL JAQUISS News | Posted In: CLEAN UP

California Pension Fund Fires the Adviser it Shares with Oregon Funds: Updated

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The nation's largest pension fund announced yesterday it would fire a long-time adviser.

The California Public Employees' Retirement System, which manages more than $200 billion in assets, ended its relationship with the Pacific Corporate Group, which both advised Calpers on investments in leveraged buyout funds and also managed money for Calpers. According to news reports, Calpers was concerned both about poor performance and potential conflicts of interest. The move comes after a long series of investigations into influence peddling at state pension funds in California, New York, New Mexico and other states.

The move is significant in Oregon for a couple of reasons: first, as the country's largest pension fund, Calpers often sets the tone for other state pension funds. Second and more germane to Oregonians, PCG is a long-time adviser to the Oregon Investment Council, which oversees more than $60 billion in state Public Employees' Retirement System pension dollars and other state funds.

PCG has long advised the state investment council on which leveraged buyout funds to invest with. PCG also sought to manage money for the OIC. But board members rejected that dual role, saying it could be a conflict of interest for a firm to both manage money for Oregon and tell the state which investments were the most promising.

The state investment council will pay PCG $900,000 for its advice this year and $950,000 next year under the terms of a contract agreed to in 2006. James Sinks, a spokesman for State Treasurer Ted Wheeler (who sits on the OIC and whose staff deals with the money managers who invest state funds) says PCG was both the highest rated and the cheapest of the advisers who competed for the state contract.

PCG has another Oregon connection. Gerard Drummond, a former Portland lawyer and utility executive, serves as the chairman of the board of PCG Asset Management. Drummond, who served on the OIC for 17 years in two different stints—including 14 years as chairman—joined PCG Asset Management after leaving the OIC in 2006. Drummond and Treasury officials told WW earlier this year that he has no contact with treasury staff and personally plays no role in advising the OIC on which investment managers to hire.

Updated at 11:15 am:

Treasury spokesman James Sinks provided the following statement in response to a request for comment on the CALPERS move:

Unlike California, the Oregon Investment Council has not contracted with PCG to directly manage any funds. The company serves as an independent consultant to the OIC on “private equity” funds, and recommends opportunities that may arise in the secondaries market.

The Oregon Investment Council is protective of Oregon assets and takes any allegations seriously, and arranged a briefing with PCG executives about the issues that sparked the California concern. There is confidence that Oregon has continued to receive expert and independent analysis, and that advice has helped to maintain Oregon's top-tier investment performance. (The consulting arm of PCG that deals with Oregon is separate and insulated from the part of the company that raised concerns.)

Even with the confidence, remember that he OIC does not rely solely on its consultants to vet potential investments. Those are chosen through a multi-tiered due diligence process in which the State Treasury evaluates a proposal, and it is separately evaluated by the consultant. Then, any investments must pass muster with members of OIC (which is not monolithic) and then the negotiations and terms of every deal involve the DOJ.

In September, the OIC extended [PDF] the contract for PCG by two years. That said, under the contract, the OIC retains the right to terminate, at will.

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