The New Mexico State Investment Council has recouped more than $24 million from Vanderbilt Capital Advisors in its ongoing effort to recover investment losses, management fees and payments to placement agents related to the state’s pay-to-play scandal, the SIC said in a statement.
In 2011, the SIC filed a suit claiming that several individuals had been enriched by politically motivated investments through the pay-to-play scheme, which is alleged to have occurred from 2003 to 2009. Although Vanderbilt was not named as a defendant in that lawsuit, the firm would have been included in a second round of litigation, according to New Mexico SIC.
The $24 million payment resolves disputed claims between the SIC, the New Mexico Educational Retirement Board and Vanderbilt, according to a statement. Last year, Rustic Canyon/Fontis Partners paid the SIC $250,000 in a settlement related to the scandal.
In 2009, the SIC's private equity advisor – Saul Meyer-led Aldus Equity Partners – was implicated in New York State Common Retirement Fund’s pay-to-play scandal. It quickly became clear that Meyer had perpetrated a similar scheme in New Mexico – allegedly in collusion with state investment officer Gary Bland and certain other ‘politically-connected individuals’ (Bland has denied all the charges and last year launched a counter-claim against NMSIC for damages).
The main problem that the old SIC had was a concentration of power.
“The main problem that the old SIC had was a concentration of power, where you had one individual or two individuals – one of those being the Governor, who appointed the state investment officer – who had the ability to call the shots and had the ability to push through investments if they wanted to,” NMSIC spokesperson Charles Wollman told Private Equity International.
According to court documents, Bland, Meyer and longtime Richardson advisor Anthony Correra allegedly used that ability to direct commitments to funds that had hired Correra’s son Marc as a placement agent, even though many of those individuals had nothing to do with the commitment process.
“[After Meyer was implicated], what we did as staff is gather a bunch of information, talk to all of our partners, both in private equity and all of our other investment partners. Went to them, and from there developed a database on who had gotten paid what,” Wollman said.
The SIC eventually discovered that Vanderbilt was among the many firms that had hired Marc Correra as a placement agent.
“[The SIC] has pursued and will continue to pursue claims against fund managers like Vanderbilt that NMSIC believes received investments in exchange for political favors, including payments to Marc Correra and other politically connected individuals,” according to the state’s motion to approve the settlement.
“This is a significant recovery of money for the taxpayers of New Mexico, and it demonstrates how diligently this Council has worked over the past two years to bring a measure of accountability following a deeply disappointing chapter in New Mexico history,” Governor Susana Martinez said in a statement.
Picking up the pieces
In addition to exploiting the SIC’s investment process, the pay-to-play scandal also exposed several holes in the
There was no investment committee, there was no audit committee, there was no governance committee.
Council’s governance policies. Repairing those holes, and improving the investment process, required a serious effort on the part of new state investment officer Steven Moise and his deputy Vince Smith.
“There was no investment committee, there was no audit committee, there was no governance committee,” said Moise, who spearheaded the governance overhaul. “So we have now put in place a governance structure that has several levels … It’s a huge number of filters.”
The addition of those filters became even more important as Smith launched a reboot of the SIC’s investment programme. This included the firing of all its investment advisors, with the exception of Sun Mountain Capital, which manages SIC’s $369 million in-state private equity and venture capital investment programme.
“I could see the things that were most wrong with the portfolio, and I could see that Steve was fixing a lot of the things outside investments, [which let] me focus just on the investment process,” Smith said.
After adjusting the programme’s overall return target to 7.5 percent and moving the SIC’s portfolio away from equity and in-house strategies, Smith turned his attention to the private equity portfolio, which had grown “pretty weedy”.
“In the private equity [portfolio], the goal is to reduce the number of relationships – we had around 80 or so relationships … across 120 or so funds. We’d like to halve both of those numbers,” he said. “That’ll take us years and years of course; the older managers sort of have to run off.”
Under Smith, the NMSIC has made larger commitments among a smaller number of relationships – while retaining its 10 percent allocation to the asset class. The 2013 private equity plan calls for $350 million to $450 million in commitments across six to eight managers, which would equate to approximately $44 million to $75 million per commitment, according to documents. That total would be similar to the $450 million New Mexico committed last year across six managers.
The reforms have already yielded results. Less than three years after the scandal, the SIC’s flagship Land Grant Permanent Fund generated a 14.45 percent return for 2012, placing it in the top 15 percent in the country among public funds with $1 billion or greater, according to Wilshire Associates.
Private Equity International takes an exclusive look at the overhaul of the New Mexico State Investment Council in the March issue of Private Equity International.