Point Judith Made More than Providence on Pension Fund
Friday, November 22, 2013
While recent scrutiny has been paid to how much the pension systems of the State of Rhode Island -- and City of Providence -- have invested in hedge funds and their subsequent fees and returns, reports filed by the City's investment counsel show that Providence may have paid more in fees to Point Judith Capital than the current value of any gains on its investment managed by General Treasurer Gina Raimondo's former firm.
Moreover, the now 1.5% management fee paid to Point Judith by the City of Providence is the highest fee in its asset class, and only one manager -- hedge fund Graham Global -- had a higher fee at 3.0%. That is, until in a high-visibility move earlier this month, the City's Board of Investment Commissioners voted to move over $4 million out of Graham Global into a lower-fee, higher performing hedge fund.
Last month, the City of Providence Employee Retirement System showed a market value of $1,097,727 for its investment with Point Judith Capital -- and records show that for the first six years of the investment alone, Point Judith was paid 2.5% in management fees annually, which on an initial $1 million dollar investment would mean the city was paying the private equity group as much as it gained from its performance -- if not more.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST"If Taveras wants to cut fees, dumping Point Judith is exactly what he should be looking at," said former SEC lawyer and Forbes columnist Edward Siedle, who last month issued the report following his months-long investigation into the state pension system -- and called for a SEC probe into its management.
"Further, if he tries to sell Providence's ownership interest in the Point Judith fund for the $1 million plus it's supposedly worth, good luck. Only after he gets his money out will he know just how badly the fund has performed. Why wait and keep the public guessing?
Value of Investment?
In his report issued on the state pension system, Siedle questioned Rhode Island's relatively high fee paid to the Point Judith for its own investment, and said that the SEC should investigate questions surrounding ESRI's Point Judith Venture.
"It appears that the 2.5% asset based and 20 percent performance fees paid to Point Judith by ESRI are significantly higher than the then venture capital industry standard of 2% asset-based and 20 performance fees. Since Point Judith Capital was a small, unproven manager at the time of the investment by ESRI, there is no reason to believe the firm should have commanded a higher fee."
Siedle continued in his report, "The Treasurer has made numerous public statements regarding the performance of the Point Judith II fund, as well as released summary performance figures which are strikingly divergent. Based upon incomplete information she has provided, the performance of the investment has ranged from her initial claim of 22 percent, to 12 percent, to 10.9 percent, to 6.2 percent, to 4 percent, to -16.7 percent."
Regarding the scenario facing Providence with Point Judith fees -- and questions of performance -- Siedle said "Taveras holds the keys to get the answers to the questions about Point Judith," said Siedle.
Siedle said the fees were beside the point -- "they're pretty much the industry norm" -- but it was the fund's performance, and worth, that he called into questions. "Taveras should call Point Judith and ask them what it's worth."
Siedle said that on the open market, he thinks the fund would be devalued "at least 50%".
"The bigger point is that the performance looks far worse than anything anyone thinks," said Siedle. "What if they City paid Point Judith the $150,000 in fees, and it's worth substantially less than even the $1.1 million shows? Even the footnotes say the value of these alternative investments have been estimated...they do not reflect liquidation values."
Fees in Question
Last month, GoLocal's Stephen Beale investigated how much the state's pension system paid to Point Judith to manage $5 million in assets -- and reported that Point Judith had earned nearly $580,000 off of the investment, while the state to date had received payments of $965,577, after all fees have been paid.
Furthermore, Beale stated that the treasurer’s office declined to disclose any of the terms of its investment agreement with Point Judith, including the rate for the management fees the firm has been earning as well as Point Judith’s share in the profits, known as “performance fees.”
With the fees disclosed for the City of Providence, Siedle says it's up to Taveras to pursue looking into what it's worth.
"It would be shocking to see if the City ultimately decided to get out of Point Judith," said Siedle. "What's interesting right now is that politics in Rhode Island have become a debate of pension nuance. Where else in the country do you have someone running for Governor who's in a position to expose the record of another candidate?"
Related Slideshow: See How Much Providence Pays in Pension Fund Fees
Per investment information obtained by GoLocal, the following are the management fees paid by the City of Providence Employees Retirment System (as of April 2013 -- Graham Global funds were moved at the last city Investment commission meeting).
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