Friday Letter The trouble with New York

Carlyle’s $20m settlement with New York’s attorney general prevents the potential for litigation against the firm and preserves its relationship with a major LP. But there are some troubling implications for the private placement industry.

Blackberries started blinking and buzzing yesterday when The Carlyle Group said it would pay a $20 million settlement for its role in the New York Common Retirement Fund kick-back scandal.

It was not the amount that likely caught most industry insiders’ eyes – in one sense, it is a small price to pay to preserve the firm’s multi-billion relationship with one of the largest limited partners in the US and avoid potential legal battles. (Carlyle currently manages some $1.5 billion on behalf of the pension, according to the New York Times.)

Also not particularly eyebrow-raising was the revelation that Carlyle will sue Hank Morris and his associated ‘placement’ firm, Searle, for more than $15 million in damages. This was perhaps inevitable for Carlyle, which has not been charged with wrongdoing and has maintained it was a victim in Morris’ “alleged web of deceit”.

The firm also agreed not to give political donations to officials that make pension investment decisions. This is important but not necessarily earth-shattering – concerns over campaign contributions were what drove the California State Teachers’ Retirement System to adopt a placement agent disclosure policy back in 2006.

But what was surprising yesterday – and will be game-changing without a doubt – is the buyout firm’s agreement to discontinue use of all intermediaries – including legitimate placement agents – to secure fund commitments not just from New York pensions, but from any and all US pensions.

This may not have adverse fundraising effects on Carlyle, which has a large internal investor relations team. But if it becomes a precedent followed by others, it will negatively impact the business of placement agents that do provide clients real value. It effectively endorses the narrow view being pushed by Attorney General Andrew Cuomo – and gradually being adopted by the US public at large – that all third-party intermediaries are created equal, and should universally be viewed as shady characters and political fixers skimming money off the top of transactions.

“If Boss Tweed were alive today, he would be a placement agent,” Cuomo remarked during a call with reporters yesterday. Tweed, a notorious New York crook, bribed city officials in the 19th century to steal millions of dollars of tax payers’ money.

The infuriating thing, say placement agents and even some senior pension officials, is that Cuomo – and now the general media and public at large – are failing to distinguish or even understand the difference between “finders” or “introducers” on the one hand and legitimate placement agents on the other.

The Attorney General, in keeping with his track record as a prosecutor, is expected to use Carlyle’s adoption of his code of conduct as leverage to force other firms to do the same. “A pattern is emerging where Cuomo gets a major player in an industry to agree to a settlement or a code of conduct and the rest of the industry tends to follow,” Jacob Zamansky, principal of New York securities law firm Zamansky and Associates, told Bloomberg. “It appears to be a successful strategy which will continue.”

This of course bodes badly for the legitimate fund placement industry, whose largest source of capital has traditionally been US pension funds and institutional investors.

Industry participants who know the placement business well – from senior pension officials to general partners and fund investors – must help educate the individuals investigating the kick-back scandal to make certain that any policies developed ensure the good guys are not cast out with the