CalPERS warns HRJ ruling sets dangerous precedent

Capital Dynamics’ fund of funds HRJ Capital has been in a dispute with former employees who claim to be owed in wages and management fees.

The California Public Employees’ Retirement System believes a recent ruling awarding $10 million to former employees of HRJ Capital could be a bad example for the future of the LP-GP relationship.
 
A jury in March awarded former HRJ employees Kok-Wai “Darren” Wong and Duran Curis $10 million total, although Santa Clara Judge James Kleinberg hasn’t ruled on a verdict yet because HRJ motioned for a new trial. Another former employee, Lane Auten, reached a settlement earlier. The former employees had argued they were wrongfully terminated and owed compensation, among other fees. Last November, Judge Kleinberg ruled that as the fund agent HRJ was liable to pay the employees.

Switzerland-based Capital Dynamics bought HRJ Capital’s private equity assets and took over the firm’s GP commitments in 2009, according to Private Equity International’s Research and Analytics division. HRJ had run into liquidity problems in the global financial crisis when an over commitment strategy during the boom cycle left the firm without the funds needed to meet certain capital calls, as well as to repay Silicon Valley Bank roughly $70 million for a warehouse facility.

In a brief filed with the Superior Court of California for Santa Clara County, CalPERS said it foresees risks for the future of the private investment fund industry after the Court ruled HRJ was liable to the employees, according to the brief. CalPERS is not an LP in any HRJ funds. 

Judge  Kleinberg hasn't ruled a verdict.

The largest public pension plan in the US calls the Court’s ruling “wrong as a matter of law and as a matter of public policy”. In its 12-page brief, CalPERS explained the harmful impact the judge’s ruling could have on institutional investors. One key risk would be the increased exposure to “liability for the activities of a separate legal entity”. 
 
“CalPERS believes the Court’s decision threatens to fundamentally alter CalPERS’ and other investors’ expectations of their risks and investment returns,” the brief disclosed. “Exposing investors to this additional risk is detrimental to California’s vibrant private fund industry, and to California’s economy in general.”

The pension system supports a motion for a “new trial or judgement notwithstanding the verdict” that was previously requested by HRJ and its defendants, according to the brief. 

Founded in 1931, CalPERS has more than $237 billion of assets under management, according to the brief. The system has about $32 billion or 12 percent of its assets allocated to private equity, as of 31 March. Most of these private equity investments are made to funds where CalPERS is “typically one of the larger investors, if not the ‘anchor’ investor”, the brief states. CalPERS’ investments are estimated to support close to 1,500 local companies and 190,000 of the state’s jobs, since most of its commitments support California-based funds, according to the brief.