New York City Comptroller Scott Stringer is looking to loosen strict rules that govern private-equity firms managing the city’s pensions — a potentially risky policy switch that he claims will improve returns, The Post has learned.
Specifically, Stringer — a Democrat running for mayor in this year’s election — is urging trustees of the city’s pensions to lift a blanket rule on Wednesday that has required private-equity firms to pay their own bills if they get into scrapes with regulators or end up in litigation with investors, according to a memo obtained by The Post.
Lifting the rule — which was imposed in 2016 as a precaution after a slew of big buyout firms including Carlyle Group, Blackstone Group, KKR and TPG were forced to pay out nearly $600 million to settle a civil collusion case — could potentially saddle taxpayers with millions of dollars in liabilities.
Indeed, city officials imposed the so-called “GP Expenses Provision” after Carlyle Group, headed by billionaire David Rubenstein, stuck its own investors with more $100 million in payouts related to the collusion case in 2015, sources said.
Despite such concerns, Stringer argues that the rule has lately deprived the city’s pensions for employees, teachers, police and firefighters of promising deals with top-performing buyout firms. Last year, three such deals worth a total of $843 million fizzled because of the rule, according to the memo from Deputy Comptroller Alex Done.
Silver Lake Partners, a Silicon Valley-based fund, scrapped talks with the city last June to manage $313 million for New York City because of the rule, he said. A month later, Nordic Capital and a co-investor skipped out of a $280 million deal. And in September, talks fell through with Chicago-based Thoma Bravo to manage $250 million for city workers, according to the memo.
Silver Lake, Thoma Bravo and Nordic Capital all declined to comment.
“Each of these managers has delivered first-quartile historical track records” and all of the funds were oversubscribed at the time, Done wrote. “These missed opportunities (and any future missed opportunities) of high-performing, in-demand managers have the potential to negatively impact [city pensions’] ability to maximize risk-adjusted returns.”
He added that the city would keep restrictions in place in cases where a buyout firm’s “past behavior” suggests that taking on its legal risks wouldn’t be a good idea.
In the case of Silver Lake, the fund has been snagged with multiple suits over alleged improper behavior. In 2014, Silver Lake agreed to pay $29.5 million for its role in the civil collusion suit that prompted New York’s 2016 clampdown. Now, Silver Lake is being sued by investors in satellite operator Intelsat over alleged insider trading. Silver Lake has denied the allegations.
“We are currently the only pension system with this uniquely stringent requirement and the trustees are engaged in a discussion about impacts to competitiveness,” a spokeswoman for Stringer said in a statement on Tuesday. “As a fiduciary, the Comptroller believes in holding private-equity funds accountable for their own wrong-doing and is working with the trustees to ensure we maintain the best possible investments for the funds.”
New York City’s pensions representing 584,000 members have a total of $12.8 billion invested in private equity, according to a July report by private-equity lobbying group, the American Investment Council. That makes it the eighth-biggest investor in private-equity funds among public pensions, the report said.
Nevertheless, the city’s pensions only managed to allocate 6.8 percent of their assets to private equity as of last June, missing a target of 8 percent, according to a 2020 financial report by the city. That’s despite the fact that the city expects PE’s yearly rate of return will be 11.2 percent, dwarfing that of stocks or bonds, according to the report.
Now, the city is looking to raise this year’s allocation of funds to private equity by 40 percent to $5 billion, and Stringer frets that competition to invest with top private-equity managers is growing.
“With zero or negative interest rates across much of the world right now, more money is expected to flow into private markets and amplify the competition for allocations to strong managers,” according to the memo.
There may be a way for New York City, however, to reach that target without caving to pressure from the buyout firms, said Jordan Thomas, a partner at law firm Labaton Sucharow who is a former assistant chief legal counsel for the Securities and Exchange Commission’s division of enforcement.
“If I were New York City and I really cared about this, I would go to CalPERS and join together,” Thomas said, referring to the California Public Employees Retirement System, the nation’s biggest pension fund. “I think this is eminently doable but they need some backup.”
“I think what New York City asked for is not crazy,” Thomas said of the GP Expenses Provision. “The most baffling thing about security laws is you can do bad things if your investors agree to it.”