MVision Private Equity Advisers has waded into the furore over the controversial proposed rule from The US Securities and Exchange Commission that threatens the livelihoods of many third party solicitors of capital.
In a letter submitted Wednesday to the SEC, chief executive Mounir Guen backs the SEC’s move to kill “pay to play” practices, stressing that the firm has never itself indulged in such activity.
But at the same time, he tells the SEC that inclusion of a rule designed to completely prohibit the retention of placement agents or other third parties from soliciting governmental entities for investment advisory services will have “serious adverse unintended consequences for investment advisors and public pension plans alike”.
Finders are often individuals who provide no professional services, but for a fee offer to make introductions or claim to be able to influence the investment decision-making process.
Guen also says it will have the same consequences for small and emerging companies whose survival and growth depends upon capital infusions from these government entities.
At the heart of the firm’s submission is that the SEC should distinguish between placement agents and so-called “finders”.
“Placement agents are legitimate businesses that provide wide-ranging and valuable professional services to investment advisors, services that ultimately benefit institutional investors, including public pension plans. In contrast, finders are often individuals who provide no professional services, but for a fee offer to make introductions or claim to be able to influence the investment decision-making process at public pension plans,” he argues.
The research resources of public investment fund managers are also often limited, and without the assistance of a placement agent, there would be no way for them to be able to become aware of what very often is a compelling investment opportunity.
He goes on to say that banning legitimate placement agents would be inappropriate because it would deprive every US public pension plan and thousands of investment advisors of the essential services of legitimate placement agents with “severe economic consequences”.
Another prominent international private placement firm, CP Eaton, also wrote in to the SEC on 27 August criticising the proposal for being “overbroad” and, like MVision, highlights how it would limit investment choices for public funds.
CP Eaton said it was in contact with more than 2,000 institutional investment organisations primarily in the US and Europe as well as 10,000 individual investment professionals.
“No small or new manager could possibly have the ability to identify or reach out to that many prospective investors during their fund’s offering period,” it said. “Likewise, the research resources of public investment fund managers are also often limited, and without the assistance of a placement agent, there would be no way for them to be able to become aware of what very often is a compelling investment opportunity with a new fund.”
The two letters are the just the latest in a cacophony of protest from placement agents railing against the SEC’s proposed rule, titled “Political Contributions by Certain Investment Advisers”, published in early August.
Others that have recently put forward opinions officially include Rick Dahl, chief investment officer of the Missouri State Employees Retirement System who wrote on 13 August: “It is our view that some of the best investment opportunities are with smaller firms that have spun-out from larger organisations or are raising institutional capital for the first time.” He also said placement agents helped to pre-screen GPs.
One answer to criticism of a blanket ban has been that all firms could establish marketing staff, but in his letter, MVision’s Guen argues that even if smaller firms attempted this it would be difficult to replicate the level of service and efficiencies provided by agents.
Other unwanted results from a ban would include reduced competition among investment advisors because only the largest would have ready access to public pension plan capital. “A very large number of (small and medium-sized) firms will suffer,” says Guen.
Part of the answer could be to require annual declarations confirming no relevant political contributions have been made, with breaches of relevant regulation carrying severe penalties including loss of licence, Guen said. Letters of engagement with investment advisors could contain specific language regarding prohibition or relevant political contributions.
Those points on political contributions come just days after an explosive article in USA Today linked more than two dozen firms that have surfaced in the broad corruption investigation in the pay to play scandal with political contributions they have made to officials with “potential influence” over the funds’ investments. As reported on PEO earlier today, a CalPERS board member is facing an ethics probe over campaign contributions from a placement agent that secured roughly $3 billion in commitments from the pension for Apollo-linked funds.