California passes placement agent bill

Placement agents that work with California’s public pension funds will be required to register as lobbyists, putting an end to fees based on the success of a fundraising.

The California state assembly this week passed legislation that will force placement agents hired by private equity firms to win business from the state's public pensions to be paid flat fees up front instead of compensation based on successful fundraisings.

The bill, AB 1743, passed with a 61-12 vote on Tuesday. The bill now goes to California Governor Arnold Schwarzenegger.

California’s bill, which was proposed before the US Securities and Exchange Commission issued federal rules on placement activities in June, would require placement agents to register as lobbyists, a separate requirement from the SEC’s rules.

As lobbyists, placement agents will be exposed to stricter disclosure requirements, as well as ending payments for successful fundraisings. Placement agents under the bill would instead be paid flat fees up front, as are lobbyists.

At least one private equity firm, The Blackstone Group, took action to try and end the contingency fee provision in the bill. In April, Blackstone hired a lobbying firm, California Strategies, to argue against the provision.

Blackstone, which has a fundraising affiliate, Park Hill, supported beefed up disclosure requirements for placement agents, and also supports ending political contributions made by placement agents to officials in charge of investment decisions at public pensions.

But the firm took issue with ending contingency fees.The firm argued the payments give placement agents an incentive to perform extensive due diligence on funds because they will only take fundraisings they believe will be successful.

California politicians had trouble getting the bill passed.

The bill failed in a vote in the State Assembly’s Appropriations Committee in June. The bill has passed unanimously in two other Assembly committees.

The California Public Employees’ Retirement System co-sponsored the bill in the wake of allegations that a former member of the pension’s board had been paid millions of dollars in fees to solicit commitments from the pension for Apollo Management and other firms.

The $210 billion pension fund performed a massive review of placement agent fees paid by its managers, and also reviewed its relationship with Apollo. The Apollo review led to the firm agreeing to slash some of its fees in the structured products it manages for CalPERS.