Will Magaziner Divest from Firm Charged by SEC?
Friday, November 06, 2015
Rhode Island General Treasurer Seth Magaziner said that the actions of a state investment firm charged by the SEC are “unacceptable” but his office explained that the decision of whether or not to divest from Fenway Partners, who settled for over $10 million on the allegations it failed to disclose conflicts of interest — is a complicated one.
“The unacceptable actions of Fenway Partners is a clear example of why stronger pension transparency is so important,” said David Ortiz, Spokesperson for Magaziner.
Fenway Partners, which manages $30 million of Rhode Island investments, was dubbed a zombie firm by the New York Post following this week's SEC charge, as New York City pension funds were also invested. “Fenway is considered a zombie firm as its returns have been so poor it cannot attract enough new money to invest or meet the needed performance threshold to make 20 percent commissions on buying and selling the companies it owns.”
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTThe State of Rhode Island invested $30 million in two seperate instances with the firm, which has had a two percent rate of return over the past eight years.
“As far as Fenway is concerned, Rhode Island originally decided to invest in Fenway II in 1998 and Fenway III in 2007 – both before Cliffwater was hired as the state’s investment consultant and well before the life of this administration,” said Ortiz. “From the combined $30 million that Rhode Island invested in Fenway II and III, the state has gotten back $33 million so far with an estimated $7 million of value still invested in Fenway’s portfolio companies.”
Ortiz said the Treasurer was keeping his options open regarding Fenway Partners - based on the" fiduciary responsibility" of the state.
“Private equity funds are not liquid investments. Private equity firms raise capital to buy companies with a plan to make them more valuable and sell them at a profit for investors. For the limited partners, getting out of a private equity fund before its completion is kind of similar to selling a home; if you want to make a profit, you may have to wait until market conditions are in your favor," said Ortiz. "Regarding Fenway Partners, we are closely monitoring the fund and all options will remain on the table as we work to preserve Rhode Island’s capital and improve the health of the pension system."
Council 94 Concerns
What will the Treasurer do if -- and when - RI investments who won't disclose fees get axed under his new policy?
"I find it’s troubling that this info is found out now, considering AFSCME had hired Edward Siedle, and he found out these things, and that the State Investment Commission wasn't looking," said Downey.
Siedle, a Forbe columnist and former SEC lawyer, had flagged Fenway Patners in his most recent report.
Downey said that in the upcoming General Assembly session, that Council 94 would be seeking to introduce legislation to have specific representation on the state investment commission.
"We want an additional member on the commission representing the pensioners. The fund’s doing terrible, I think this performance is the worst ever. It's alarming, and I’m getting many phone calls on it. We find it all very troubling, and we’re demanding something be done," said Downey.
Ortiz said that Magaziner is "leading they way" in addressing fees -- and transparency.
"Treasurer Magaziner has been outspoken about the need for better investment transparency so that bad behavior like this can be averted. Private equity firms like Fenway Partners should not have the opportunity to overcharge investors, and the new administration at the Rhode Island Treasury will continue to act aggressively to prevent acts like this from occurring," said Ortiz.
"In July Treasurer Magaziner led a group of 13 state treasurers and comptrollers in asking the SEC to improve disclosure of fee and expense practices in the private equity industry to shine a light on this type of behavior and prevent it from occurring in the future. He also enacted a tough new policy that beginning in June of this year, Rhode Island will only invest in funds that agree to full disclosure of performance and fees. We believe this policy to be among the toughest of its kind in the country, and will decrease the likelihood of Rhode Island being overcharged by a fund manager in the future."
Related Slideshow: RI Public Pension Reform: Wall Street’s License To Steal
See the key findings from Forbes' columnist Edward Siedle, who unveiled his investigative report into the RI pension system, "License to Steal," in October 2013.
"The Employee Retirement System of Rhode Island has secretly agreed to permit hedge fund managers to keep the state pension in the dark regarding how its assets are being invested; to grant mystery hedge fund investors a license to steal, or profit at its expense using inside information; and to engage in potentially illegal nondisclosure practices," said Siedle.
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