calpers

By Dale Kasler
dkasler@sacbee.com
Published: Thursday, Jul. 24, 2014 – 8:32 pm

It’s been one of the darkest chapters in CalPERS history, a bribery scandal that prompted a guilty plea from its former chief executive earlier this month.

It’s also been rather profitable.

America’s largest public pension fund has racked up sizable gains from investments brokered by Alfred Villalobos, the Nevada businessman accused of bribing top CalPERS officials. One $974 million investment midwifed by Villalobos is now worth $2.91 billion. A $701 million deal is valued on CalPERS’ books at $1.36 billion.

The track record on Villalobos’ deals represents one of the great ironies of the CalPERS influence-peddling scandal. During a six-year stretch that ended in 2008, the California Public Employees’ Retirement System poured more than $4.4 billion into investments marketed by Villalobos on behalf of Wall Street clients. Out of 11 separate deals, only one has lost money, a relatively small transaction in which CalPERS invested $75 million.

Experts say CalPERS’ investment profits don’t tell the whole story. They say Villalobos’ alleged misdeeds cost CalPERS money even though the deals he brought to the pension fund largely panned out.

A 2011 investigative report commissioned by CalPERS said the pension fund likely paid tens of millions of dollars in additional investment-management fees because of Villalobos’ work. CalPERS routinely pays management fees to its investment partners, and the investigative report said those firms may have secretly inflated their fees to compensate for commissions they were paying Villalobos.

CalPERS was able to recoup much if not all of that money. Using its considerable clout, it launched a campaign in 2010 to extract fee discounts from dozens of investment partners, including two that had hired Villalobos.

One partner, Apollo Global Management, gave CalPERS a $125 million discount over five years – three times as much as it paid Villalobos in commissions. Another Villalobos client, Ares Management of Los Angeles, agreed to a $10 million fee reduction, or 10 times what it paid Villalobos. The two firms also pledged to stop hiring marketing agents to secure investment dollars from CalPERS.

“Through all this effort we went through, we got money back from these firms,” said CalPERS spokesman Brad Pacheco.

Villalobos’ alleged behavior also may have cost CalPERS in opportunities lost. While it’s almost impossible to calculate the damage, some potentially lucrative investments might not have gotten an audience with CalPERS because they weren’t represented by Villalobos, according to the 2011 report.

In addition, as word got out in the private equity world about Villalobos’ connections with CalPERS, it’s possible that some investment firms stopped bringing proposals to CalPERS because they “believed that the process was not fair,” according to the report, authored by Washington, D.C., securities lawyer Philip Khinda.

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