LP Radar: Hey big spender

Earlier this year, the North Carolina Retirement System was embroiled in controversy after the State Employees Association of North Carolina (SEANC) published a report about the fees the system was paying to hedge fund and private equity firms. However, state investment officials – including Janet Cowell, the state treasurer and sole trustee of the pension portfolio – refused to engage publicly on the subject, and eventually the storm blew over.

However, it looks as though the SEANC report will now be re-examined, after the association filed a second whistleblower complaint with the SEC. This time it has called on the pension to divest its hedge fund holdings – just as the California Public Employees’ Retirement System, another big US public pension, said recently that it would do – as well as demanding an end to the sole trustee model.

The initial SEANC investigation alleged that the state was paying more in fees for alternative investments than it was extracting in terms of performance. Then, just after Labor Day, SEANC filed a second whistleblower complaint with the SEC alleging that Cowell violated pay-to-play rules by taking campaign contributions from Crandall Bowles, a JP Morgan executive and wife of former White House Chief of Staff Erskine Bowles.

The Bowles’ held a campaign fundraiser for Cowell at their home. Erskine Bowles – who previously served as the head of the University of North Carolina System – is also the co-founder of Carousel Capital, a private equity firm that also employs his son as a vice-president. The North Carolina Retirement System is one of Carousel’s LPs – and it’s also invested with JP Morgan, Mrs Bowles’ employer.

SEANC argues that these various links should have prevented the Bowles’ from holding a fundraiser for Cowell in the first place, as well as making any contributions. What’s also troubling is a mandate from the North Carolina Innovation Fund – a $230 million state-backed vehicle designed to invest in North Carolina businesses – that was given to Carousel Capital in the weeks following the fundraiser (state records do not disclose how much of the fund was given to Carousel to manage).

Emails recently released by the pension cite an in-house counsel opinion that the Bowles family wouldn’t fall under the parameters of the ‘covered associate’ rule, which is defined as ‘any general partner, managing member or executive officer, or other individual with a similar status or function’.

In an emailed statement to the International Business Times, a spokesperson for Cowell said the North Carolina Treasurer’s office “ensur[ed] contractually with Carousel that they were compliant with this SEC rule”, and added that “if Carousel failed to comply with the rule, the investment would likely end”.

Erskine Bowles also insists that he hasn’t been materially involved with Carousel since 2005. However, he remains listed on the website as a senior executive, which raises the question: how much kudos (and investor interest) does Carousel get by keeping Bowles on the site? Plus the fact remains that his son is still with the firm in an executive capacity.