PCG’s California problem

In October, Pacific Corporate Group lost its oldest client when the California Public Employees’ Retirement System terminated the decades-long relationship, costing PCG millions of dollars in fee revenue.

In 2008 alone, PCG reaped $17 million from fund of funds vehicles the firm ran for CalPERS, according to information from the public pension.

The loss of CalPERS goes deeper: PCG itself has fractured. The firm has for several years been operating as several business units – PCG the parent; PCG International and PCG Asset Management.

PCG International, which makes fund investments in non-US funds, is fully divorcing from the parent organisation and is now called Aviva Capital. The Aviva team will continue to manage more than $1 billion for CalPERS in the Global Opportunities Funds I and II.

PCG Asset Management, which provides advisory services and fund of funds products, is facing some changes in relation to CalPERS. CalPERS picked Capital Dynamics to manage a $480 million clean-tech vehicle – launched in 2007 with PCG – that was within the PCG AM umbrella. Capital Dynamics will not receive any additional commitments to the fund, but will make follow-on commitments from the remaining committed capital, which amounts to more than $250 million.

CalPERS will keep its relationship with part of the team formerly known as PCG Corporate Partners, the direct investment arm which will manage the remaining investments in two Corporate Partners funds.

PCG AM, which provides private equity consulting work for institutional investors, has contracts with several large US public institutions: The Oregon Investment Council, the Rhode Island treasury, four New York City pensions and the Illinois Teachers’ Retirement System.

Oregon has already publicly expressed confidence in the PCG AM team. The firm’s contract with Oregon runs through next year. Rhode Island has a request for proposal out for a private equity advisor, meaning PCG’s contract is at or near expiration. Rhode Island has not responded to several calls for comment.

Illinois Teachers’ renewed PCG AM’s contract earlier this year and has tasked the firm with completely overhauling its private equity programme.

PCG has been down before. Its termination at the hands of CalPERS was not the first time the firm was fired by a public system client.

In 2003, PCG, run by Christopher Bower, was tasked by the New Mexico State Investment Council with vetting a venture vehicle known as the Anila Fund, run by Palo Alto venture capitalist Moses Joseph.
PCG was working as New Mexico SIC’s private equity consultant at the time and was charged with providing due diligence on opportunities for the oil and gas endowment’s fledgling emerging managers programme.

PCG recommended the vehicle, called the Anila Fund III, to the SIC. The endowment committed $15 million to Anila III in March 2003, pending some last minute due diligence, according to meeting minutes and a spokesperson for the SIC.

As it turned out, the Anila fund was nothing more than a total fraud, according to the Santa Clara County deputy district attorney John Chase. Joseph was eventually convicted of fraud and sentenced to 15 years in prison.

New Mexico never finalised the commitment to Anila and promptly ended its relationship with PCG, arguing the firm did not provide appropriate due diligence on the fund. New Mexico’s chief investment officer at the time, Gary Bland, said he was considering further litigation against PCG, but the endowment never pursued additional actions.

A person with knowledge of the pension’s consideration of Anila said PCG “dropped the ball big time”, on the Anila recommendation.

“They absolutely failed to do basic due diligence, checking for litigation, making a phone call to former institutional investors,” the person said.

PCG does not employ anyone who was involved with the Anila Fund recommendation, according to a source with knowledge of the firm. Also, no PCG client ever actually invested in the Anila Fund, the source said.