Privately Speaking: New Mexico State Investment Council

Only a few short years after it was torn apart by a pay-to-play scandal, the New Mexico State Investment Council has re-established itself as one of the most important limited partners in the industry, delivering top quartile returns. Sam Sutton meets state investment officer Steven Moise and deputy Vince Smith to find out how they turned things around

Seated at a small conference table 11 miles southeast of the art galleries and cafes that line Santa Fe’s downtown – past the vacant motels, the McDonalds and the Jiffy Lube – Vince Smith, deputy state investment officer of the New Mexico State Investment Council, is angry.  

Smith is angry because he believes his predecessors in the state investment office abandoned their sacred fiduciary duty to a state that is thousands of miles away – literally and figuratively – from the economic advantages that benefit financial hubs like New York and Los Angeles. 

But behind that anger, there is pride. 

“I was just reading stories [about New Mexico], and I couldn’t stand it; so I threw in,” says Smith, who speaks with a calm drawl. “When I was in college, I specifically [focused] on public fund management. Fixing things that are broke is what I like to do.” 

The New Mexico State Investment Council certainly was ‘broke’ when it hired Smith and his boss Steven Moise in 2010, shortly after the 2009 discovery of a massive pay-to-play scandal that had torpedoed the $16.6 billion public endowment’s credibility (for more on the scandal, see p. 32). 

With public confidence at a low ebb, the duo knew that fixing the NMSIC – which manages assets from the Land Grant and Severance Tax Funds along with the investments of 17 other government clients – would require a full-bore effort from staff, advisors and the state legislature.  

That effort entailed dramatic changes to the Council’s investment programme, internal governance policies and fund manager contracts. Importantly, it also restored a culture of ethics, something that had apparently been lacking during the pay-to-play years. 

Less than three years later, the NMSIC’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. 

“We moved extremely quickly. I’ve done this [for] 26 years, and public funds don’t move like this,” says Smith. “We’ve done in two, two and a half years what most plans might take five or 10 years to do. Hundred percent turnover in managers, almost 100 percent turnover in consultants; that stuff just doesn’t move that quickly.”


Back in 2009, the NMSIC was in crisis.  

Its private equity advisor – Saul Meyer-led Aldus Equity Partners – had been implicated in New York State Common Retirement Fund’s pay-to-play scandal. And 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’ (NB. 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, 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 … to push through investments if they wanted to,” says long-time NMSIC spokesperson Charles Wollman.  

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 and other political associates as placement agents, even though many of those individuals had nothing to do with the commitment process. 

In the belief that concentration of power had exposed NMSIC to abuse, New Mexico’s State Legislature took one of the first steps towards reform by reconstituting the Council and granting it the authority to appoint its own state investment officer. 

After Bland resigned in 2009, the NMSIC found a permanent replacement in Steven Moise, formerly of New Mexican law firm Sutin, Thayer & Brown. At the time of his appointment, he held a seat on the state’s board of finance.
Although he has experience in merchant banking, Moise does not have the sort of investment background one would expect from the head of a $16.6 billion permanent endowment. 

“They called me and asked me whether I would do this [and] I had no interest. I had no idea that it was anything I’d ever do,” says Moise. “I thought about it for a couple weeks, visited with my wife about it and said, ‘You know, I’ve never really made a contribution to public service in New Mexico and I think this would be a nice way to do it’.”

Moise believes that his abilities as a manager and attorney made him an intriguing candidate for the position. The state investment officer’s responsibilities demanded familiarity with state laws and institutions, since the necessary institutional and cultural reforms would require the NMSIC to engage with the Legislature on a regular basis.
The first step was to introduce a code of ethics and mission value statement, which reasserts the staff’s duties as fiduciaries and caretakers of the permanent funds. 

“It’s signed once a year to remind them that this is important to us,” Moise says. “We needed to develop a better culture in the office that emphasised excellent investment performance, reasonable risk and achieving both ethically and professionally.”

Along with trying to improve NMSIC’s culture, Moise also set about instituting some of the reforms suggested by fiduciary consulting firm EnnisKnupp, which had been brought in to examine NMSIC’s governance policies and practices. The firm’s final report returned 82 recommendations, many of which – such as “explicitly state in contracts that consultants work for the Council” and “develop and adopt a Council charter” – were deemed high priority. 

Several of EnnisKnupp’s recommendations focused on the level of power the state investment officer wielded over the investment process. 

Moise insists he only took the position on the condition that he would have less authority than Bland, under whom the role had been “way too sweeping, way too broad”, according to Moise. 

For example, it effectively included all due diligence on private equity investments. “From what I’ve seen, it was Gary [Bland] and Aldus [Equity Partners]. They had to go through our private equity investment committee – they had to get those investments through there – but the diligence process at the staff level was really Aldus and Bland,” says Smith. 

In its report, EnnisKnupp found that the NMSIC was “limited” in the following due diligence best practices: track record review; internal rate of return calculation; benchmark IRRs, multiples and distributions and independent analysis of performance by strategy. 

The lack of adequate due diligence proved to be problematic. However, it also may have been exacerbated by inadequate governance practices and an under-involved Council. 

“The Council has approved, but not actively participated in certain critical policy-making and monitoring functions. Two examples are asset allocation, and the approval of the due diligence process and criteria to be used for manager selection and retention,” the EnnisKnupp report suggested. 

Furthermore, although private equity commitments had to pass through an advisory committee (separate from standard investment committees), the NMSIC lacked many of the additional safeguards that are considered best practice for institutional investors, it said.

“There was no investment committee, there was no audit committee, there was no governance committee,” says Moise. “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 the NMSIC undertook a drastic overhaul of its investment programme. This included firing all its investment advisors, with the exception of Sun Mountain Capital, which manages NMSIC’s $369 million in-state programme (the money NMSIC sets aside for local private equity and venture capital investments).

One of Moise’s conditions for stepping in as state investment officer was the recruitment of “the best investment management professional we could hire”, he says. Smith – who had been with the Kansas Public Employees Retirement System – was the NMSIC’s first choice. 

“I was interviewed in-depth, and they really picked me apart,” says Smith. “Through that process, they made it very clear what the situation was. So I knew what was happening when I got here. And yeah, we came in with a plan.” 
Before Moise, the state investment officer had managed Council governance issues along with the NMSIC portfolio. With Smith’s appointment as deputy state investment officer, the Council separated these responsibilities between the two positions. 

“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 says. 

Beyond the governance issues brought to light by the pay-to-play scandal, investment performance had also suffered through the economic downturn: NMSIC’s total fund composite returns were below market medians for public plans in both 2008 and 2009.

Smith attributes NMSIC’s struggling returns at the time of his appointment to three factors. First, New Mexico’s 8.5 percent return target had led to an equities-heavy portfolio, which would only perform in above average GDP growth and low-to-falling inflation. The second factor was the weak manager selection process (which had allowed pay-to-play to happen). Finally, approximately 40 percent of the total portfolio – namely fixed income and a large portion of the equity portfolio – was being managed in-house, which created a drain on resources. 

After adjusting the overall return target to 7.5 percent and moving the NMSIC’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 says. “That’ll take us years and years of course; the older managers sort of have to run off.”

Although the private equity portfolio had performed “OK” prior to Smith’s arrival – it underperformed against the 80/20 Cambridge PE Index by 1.15 percent in 2009 – the manager selection process under Bland had clearly been lacking. Commitment sizes tended to fall in the $25 million to $30 million range, with commitments granted seemingly every month, according to Wollman. 

Under Smith, the NMSIC has made larger commitments to a smaller number of managers – 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. 

Recently, the Council has focused its commitments on funds with ties to the energy industry, picking vehicles managed by Pine Brook Partners, EnCap Investments, Riverstone Holdings and Natural Gas Partners. 

“We’re less fund-specific than strategy-specific, so we’re looking at strategies that we think are going to be long run winners,” says Smith. “We’ve been starting to look in Europe; we just committed to the Nordic fund [Nordic Capital Fund VIII, which will invest in the Nordic and German-speaking countries]. Of course, that’s the place in Europe right now, the German-speaking countries. We’re getting our toe in the water that way.”


The high standards New Mexico has applied to its governance policy are also evident in the improvements it has made to its investment processes – which now demands greater transparency both from GPs and the Council itself.  

One of EnnisKnupp’s key recommendations was that Council members should receive a more structured education on alternative asset classes, along with annual fiduciary training. 

As a result, GPs who walk into Council meetings these days can expect to get “grilled”, says Smith. “We’ve had GPs walk out the door and say, ‘Wow, those guys are engaged’,” he adds. 

A tougher board has also led to a tougher transparency and disclosure regime for private equity general partners. “We believe we are as strict or more strict than most states,” says Moise. 

However, despite the board getting more strict, one NMSIC GP told Private Equity International that the new transparency policy is much clearer than those offered by many states, where the guidelines on what information GPs need to provide tend to be less specific. 

“There have been a set of changes that have been made to the transparency disclosure statement to … help capture any placement agent usage – in order to assure transparency about who the placement agents are, whether they’re credentialed and [whether] they work for credible firms,” adds Brian Birk of Sun Mountain Capital. 

Although the new requirements have contributed to a lengthier due diligence process, Birk does not view this as a hindrance to fund managers seeking a commitment from the Council. 

“It really doesn’t add much cost. Our belief is that New Mexico is one of the groups that is leading reform in this area, and we’re going to see this sort of reporting become standard across every public limited partner in the US.”

Of course, most public limited partners in the US haven’t had to go through what New Mexico did. The NMSIC demands greater transparency from its fund managers because it has to – and the Council recognises that the citizens of New Mexico demand similar clarity and transparency from the Council itself. 

“If you want to rebuild the trust that has been lost, you have to be able to show the good, the bad and the ugly,” says Wollman. 

Ultimately, Smith and Moise’s goal is for New Mexico to set a precedent for responsible, safe investment practices that deliver strong returns. After two and a half years of rapid reforms, they’re already well on their way. 

“When all is said and done, which will be years from now, we hope that we have an investment process here that is repeatable, and is much less dependent on any one individual here in the SIC,” says Smith. 

“We really want to put those walls up; we want to put those hard processes in place that won’t let one or two people turn this thing on its head.” ?


In 2009, staff at the New Mexico State Investment Council uncovered a ‘pay-to-play’ scheme – allegedly perpetrated by State Investment Officer Gary Bland, private equity advisor Saul Meyer, members of then-governor Bill Richardson’s inner circle and others – that facilitated the distribution of private equity placement agent fees to individuals who had nothing to do with the NMSIC’s commitment process, according to court documents.

The scheme is alleged to have started in 2003, when Richardson appointed Gary Bland to the role of the NMSIC’s top investment officer. The search committee that had recommended Bland for the position included Anthony Correra – a long-time friend and advisor to Richardson, according to court documents.

After Bland’s appointment, Correra is alleged to have established himself up as a “gatekeeper” of sorts to the NMSIC investment staff. He used that role to direct Bland and Aldus Equity Partners founder Saul Meyer – at that time the NMSIC’s private equity advisor – to funnel private equity commitments to funds that had hired Anthony’s son Marc Correra and other politically connected individuals as placement agents.

Meyer eventually plead guilty to participating in a similar pay-to-play scandal at the New York State Common Retirement Fund, though he avoided jail time at his December sentencing. In his allocution, Meyer admitted to similar wrongdoing in New Mexico (Bland, however, denies all charges and is counter-suing the NMSIC).

Meyer’s involvement in New York’s pay-to-play scandal proved to be a catalyst for NMSIC staff’s investigation into its own private equity programme, at which point it was determined that a similar scheme had been plotted through Santa Fe.

“We rapidly figured out we had issues in early ’09 when Aldus, who was our private equity advisor at the time, got mentioned as part of the – in relation to – the arrest of Hank Morris and a couple of other individuals in New York,” says Wollman.

NMSIC staff responded by collecting information from their fund managers to determine what funds may have delivered fees to Correra or other illegitimate placement agents. According to New Mexico, Correra was listed as a placement agent on funds managed by Fenway Partners, Vicente Capital and Trilantic Capital Partners, among others. However, it is unclear whether any of the GPs were aware of the nature of Correra’s relationship to the NMSIC.

New Mexico has sued placement agents found to be involved with the scandal, in an effort to recover placement fees, and also to ascertain whether there was knowledge of impropriety on the part of the GPs, Wollman says. 

The NMSIC’s efforts to recover fees distributed to illegitimate placement agents are ongoing through litigation. To date, there have been no criminal charges filed in relation to the scandal.