CalPERS Rocked by Pay to Play Scandal

Al Villalobos, the chairman of the Nevada firm Arvco, is under investigation for taking $50 million in fees arranging investments for the California Public Employees’ Retirement System, of which he is a former board member.

America’s largest public-pension fund, Calpers, revealed that a former board member had reaped more than $50 million in fees for arranging investments that could saddle state taxpayers with hundreds of millions of dollars in losses.

The disclosure deepens concerns that alleged conflicts of interest are undermining state retirement funds.

The California Public Employees’ Retirement System said it is launching a “special review” into payments by money managers — including billionaire Leon Black’s Apollo Management LP — to firms including Arvco Financial Ventures LLC. Arvco is headed by Al Villalobos, who served on Calpers’s board from 1993 to 1995.

Calpers has lost more than $50 billion from bad investments, putting the state of California on the brink of bankruptcy.

The cost of shoring up Calpers, the troubled $200 billion pension fund for California public employees, will ultimately fall on the state’s 38 million residents, who are already dealing with tax increases and reduced public services.

The state and local governments are contractually bound to increase their payments to Calpers to help it make up for its investment losses of more than $50 billion in the fiscal year ended June 30. Officials around the state are calling for more oversight of Calpers, which announced Wednesday it was investigating fees paid by its investment managers.

Apollo chairman Leon Black, a major money manager for Calpers who arranged the deal for Arvco, made a total of nearly $100,000 in political contributions in 2008 to Harry Reid, Chris Dodd, Joe Biden, Max Baucus, Jay Rockefeller, John Kerry, Dick Durbin, Carl Levin, Mark Pryor, Jack Reed, Tim Johnson, Frank Lautenberg, Tom Harkin, the DSCC, John McCain, Mitch McConnell, and the NRSC.

CalPERS and Arvco have invested heavily in the ‘clean tech’ sector, with a focus on emerging markets such as India.

Two of US’ largest pension funds, California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS), have deployed more than $870 million for private equity investment in clean technology in the US and across the globe.

CalPERS, with its $246.7 billion under management, is the largest US pension fund followed by CalSTRS, with $168.8 billion. India is considered a key market for clean technology, and will likely see some investments by these pension-driven funds in the next one to four years.

There are several ways that this money could potentially find a road into India. According to its web site, CalPERS has invested $185 million into mostly venture capital funds; CalSTERS, according to a spokesperson, has invested $285 million in alternative investments including funds. One of CalPERS investees, DFJ Element, has already put money in India (along with other investors) through its 2006 investment in energy storage device manufacturer Deeya Energy, Inc., which is headquartered in California, but has a facility in Gurgaon.

The California pension funds are looking to expand ‘clean tech’ investments into China and Brazil as well.

The commitment of capital by the two pension funds has also resulted in the creation of private equity funds that will put the money to use. With a $400 million investment, CalPERS is the anchor investor in the clean energy and technology fund of PCG Asset Management, LLC. PCG is raising a $800 million global fund of which 5-10% or $40-80 million will target markets such as India, Brazil and China over the next three-four years, according to Mark Nydam, the company’s managing director.

Investment bank and financial advisory firm ARVCO Capital Research LLC is also in the early stages of putting together a new local team to lead a private equity fund focused on clean technology in India. Dusty Wunderlich, vice-president of investment banking at ARVCO, said as these pension funds have put money aside, his firm has decided to create a vehicle to put the money to use.

Apart from driving the market through their investments, CalPERS and CalSTRS have influenced other powerful pensions funds in the US since 2004 towards what the former calls “environmental investment initiatives”. This includes pension funds of the states of New York, Oregon and Pennsylvania.

Former California State Treasurer, Phil Angelides, launched a ‘Green Wave’ agenda which steered billions from CalPERS into evironmentally-based investments.

There’s a nationwide opportunity, notes Bracken Hendricks of the Washington-based Apollo Alliance of labor and environmental groups, “to literally substitute high-skill construction employment for wasted energy resources,” in the process cutting energy consumption 20 percent to 30 percent by 2020.

…In California, even as the regular state budget teeters on the edge pending a bond referendum March 2, state Treasurer Phil Angelides has launched a “Green Wave” agenda to mobilize the immense investments powers of the two multibillion-dollar state pension funds — CalPERS and CalSTRS. More than $500 million in pension investments will go to private firms developing “clean” technologies that create jobs and economic growth in the state. Another combined $1 billion in the funds will be invested in stock portfolios of environmentally screened funds — funds, as Angelides notes, that are now tending to outperform regular market funds.

And finally, CalPERS and CalSTRS will audit their $16 billion worth of real estate investments to maximize opportunities “to use clean energy, energy efficiency and green building standards.”

Angelides is now the chairman of the board for Apollo Alliance, a coalition of labor and environmental groups. They have reportedly been involved in steering the president’s agenda including bailouts, stimulus, cash for clunkers, and taxes on energy and insurance.

Glenn Beck – The Apollo Alliance

Part one

Part two

Part three

In 2007, an 18% stake in Apollo was sold to CalPERS and the Abu Dhabi Investment Authority.

Apollo Management, run by billionaire Leon Black, also sold an 18 percent stake to the California Public Employees Retirement System, or CalPERS, and the Abu Dhabi Investment Authority for about $1.2 billion earlier this year.

Last year Russel Read, the former Calpers CIO, surprised other pension fund managers when he resigned from his post to pursue environmental investments.

The chief investment officer of Calpers is resigning to pursue environmental investments after nearly two years overseeing assets at the biggest U.S. pension fund, a fund spokesman said on Wednesday.

Russell Read, who oversaw a robust 19.1 percent return for Calpers in 2007, joined the pension fund in June 2006 and has led the $244 billion fund toward investing in environmental opportunities as well as into infrastructure and commodities, helping it post four years of consecutive double-digit returns.

Read, who also has been serving as head of an advisory panel on practices in the hedge fund industry for the President’s Working Group on Financial Markets, could not be reached for comment about his decision to step down — which caught other pension fund professionals by surprise.

In May, Arvco began to come under scrutiny when it procured a $10 million investment from the New York state pension fund,

Arvco earned $100,000 in fees and a $10 million investment from Mr. DiNapoli’s office for one of its clients, Craton Equity Partners. [Bronx borough President] Mr. Ferrer’s role in introducing Arvco to Mr. DiNapoli was never disclosed in the reports of pension investments and brokers made public by the comptroller’s office every month…

“The comptroller wanted to meet Villalobos because of his extensive experience on pension fund boards in California,” said Dennis Tompkins, a spokesman for Mr. DiNapoli…

Neither Mr. Ferrer nor Mercury Public Affairs, a division of the Omnicom Group that employs him, have been subpoenaed in the investigations by Attorney General Andrew M. Cuomo and the Securities and Exchange Commission into corruption at the pension fund.

A change in CalPERS disclosure policy led to the discovery of fees paid to Arvco.

The CalPERS documents, meanwhile, show that two retired state senators, Richard Polanco and Bill Campbell, worked on deals for Villalobos, flying first class or business class. The fare was reimbursed by Apollo Management.

CalPERS in May adopted a disclosure policy on placement agents and asked its various investment partners for documents on their hiring of agents. Those documents yielded the discovery of the fees paid to Villalobos’ firm, Arvco.

The review “won’t be limited to Arvco, but Arvco started it,” said CalPERS spokeswoman Pat Macht.

Apollo has received more than $3.5 billion from CalPERS.

Mr. Villalobos’s firm pitched the services of Apollo, Mr. Black’s New York private-equity firm, according to documents The Wall Street Journal requested from Calpers in a Sept. 23 Public Records Act request. According to these documents, Apollo paid Arvco at least $40.9 million in fees.

Since 2006, Calpers has committed more than $3.5 billion to Apollo funds, the largest committment to any firm in Calpers’s $20 billion private-equity investment portfolio.

These investments have been among Calpers’s worst performers, according to fund documents. Calpers committed $1 billion in 2008 to Apollo Credit Opportunities Fund I, which invests in debt markets and was down 49% as of March, according to Calpers documents.