Mass. Treasurer Suspected of Pay-to-Play Donations

Timothy P. Cahill is criticized for accepting more than $100,000 in connection to an investment manager who has been allotted hundreds of millions of dollars in state funds to invest since Cahill became treasurer in 2003.

(March 22, 2010) – State Treasurer Timothy P. Cahill has been criticized for receiving contributions from across the country from real estate lawyers, property managers, and realtors, all dedicated to his election for governor. The funds are connected to a real estate investment manager and state pension investor who has been allotted $500 million in state funds to invest since Cahill became state treasurer in 2003, according to The Boston Globe, revealing a popular practice that many say crosses ethical lines.

The practice of investment mangers donating to politicians who have authority to allocate money to state pension plans is not illegal in Massachusetts, but many express concern that it shows a lack of transparency and presents a conflict of interest.

Several high-profile pay-to-play scandals around the country have involved politicians who oversee state pension funds and middlemen, spurring 17 states to impose fundraising restrictions on pension fund managers. The US Securities and Exchange Commission has also urged heightened regulation of pay-to-play activities, proposing regulations that would bar those who invest public pension funds from donating to or soliciting funds for the politicians responsible for choosing investment managers.

While the $106,365 in donations between 2002 and 2005 weren’t blatantly connected to Cahill, who became the state’s pension board’s chairman in 2003, The Boston Globe discovered a common thread: Michael A. Ruane, a Boston investment manager at TA Associates Realty with ties to the state’s pension.

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The Globe’s extensive review of Cahill’s fundraising practices showed that the largest one-day infusion of campaign donations with ties to Ruane – $40,250 – was deposited just a day before the Pension Reserves Investment Management board voted unanimously to give Ruane’s company $100 million to invest. The cluster of donations, mostly $500 checks, came via almost 250 checks from Texas, Missouri, Colorado and Florida, among other states. Yet, Cahill and Michael Travaglini, the state pension board’s executive director, claim there’s no connection among Cahill’s fundraising, investment decisions, and Ruane’s firm.

Now, Cahill, who is running for governor as an independent, is using that money for his election this year, reported The Boston Globe. Since 2003, Ruane’s investment management firm has earned $34 million in management fees and has allocated $500 million in pension funds to invest.

The story follows recent news from the California Public Employees’ Retirement System (CalPERS), which showed middlemen earned $125 million in fees for helping funds get business with the fund giant. In response, CalPERS is reportedly working on ending the perception that placement agents are crucial to getting hired by the fund, boosting transparency by seeking details about placement agents hired by its investment partners, the investments they promoted and the fees they were paid.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(March 19, 2010) — Yale University’s $16 billion endowment will trim hedge fund investments to increase its percentage in private equity and real estate, Bloomberg reported.

“Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management,” the report released yesterday stated. “The endowment’s long time horizon is well suited to exploiting illiquid, less efficient markets such as venture capital, leveraged buyouts, oil and gas, timber and real estate.”

According to the university’s annual report, Yale, the second-richest university after Harvard University, has dramatically reduced its dependence on domestic marketable securities over the past two decades by shifting to nontraditional asset classes. In 1989, 70% of the endowment was invested in stocks, bonds, and cash. Today, only 11.5% is invested in domestic marketable securities. Foreign equity, private equity, absolute return strategies, and real assets, which include real estate and commodities, represent 88.5% of the target portfolio, Yale’s endowment report noted.

The fund will increase its investment in private equity to 26% from 21%, while targeting an increase in its investment in real assets to 37%, up from 29% as of June 2009.

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Both private equity and real estate contributed to Yale’s investment loss of 24.6% in fiscal 2009, when US college and university endowments lost nearly one-fifth of their value with an average endowment loss of 19%. Yet, in the decade through June, Yale generated an average annualized net investment return of 11.8%, surpassing Harvard’s 8.9% gain.

Yale’s CIO David Swensen, one of the best-regarded investors and champion of the “Yale Model,” the investments style that relies heavily on diversification into the so-called illiquidity premium offered by alternative assets, has also expressed no interest in allotting more money to fixed income investments. Swensen, Yale’s CIO since 1987, stands by the endowment’s 4% target asset allocation to fixed income. “Yale is not particularly attracted to fixed income assets, as they have the lowest historical and expected returns of the six asset classes that make up the Endowment,” the university’s report stated. “In addition, the government bond market is arguably the most efficiently priced asset class, offering few opportunities to add significant value through active management.”

In recent news, Swensen has also criticized the fee structures at large buyout firms, highlighting concern over the rise in management fees. “As funds get bigger, the percentage of fees stays constant, but the number of people involved does not correspond,” said Swensen, according to Financial News. “Management fees become a profit centre and the goal becomes to protect the franchise rather than deliver great investment returns.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742