NY ban on middlemen bad news for private equity
Private equity firms, already squeezed by the credit crisis, will find themselves under more pressure after New York State barred the use of middlemen to help them attract money from its $122 billion pension fund.
The current New York State comptroller banned placement agents, paid intermediaries and registered lobbyists on Wednesday, as a result of federal and state probes into kickback fees.
The investigations have been gathering steam since March when the state and the U.S. Securities and Exchange Commission charged two top aides to the former state comptroller with making more than $15 million in fees for helping private equity firms get a piece of the state’s pension fund.
The ban, which observers expect will be followed by other states, could have the biggest impact on small private equity funds that lack the staff and budget to conduct extensive fund-raising activities themselves.
“I think it is very likely to gather momentum,” said Michael Holland, founder of fund manager Holland & Co and a former partner at private equity firm Blackstone Group. “I’d be very surprised if other states don’t follow that lead.”
D.C.-based Carlyle Group CYL.UL, and New York’s Quadrangle Group have been caught up in the probes, but have not been accused of wrongdoing.
Carlyle said Wednesday it would stop using placement agents when seeking investments from public pension funds in the United States.
Quadrangle, co-founded by Steven Rattner, President Barack Obama’s auto task force chief, had no comment paydayloans.
Placement agents act as middlemen between pension funds looking for places to put their money and private equity funds seeking investments.
The business has been growing, according to London-based research firm Preqin. Of the private equity firms that raised funds in 2008, 54 percent used a placement agent, up from 45 percent in 2007 and 40 percent in 2006, it said.
The placement agent business is mostly made up of brand name firms such as Credit Suisse’s Private Fund Group and Blackstone’s Park Hill Group, according to Preqin.
“Placement agents are … professional outfits, which are very valuable to the private equity industry and provide them a number of services,” said Tim Friedman, Preqin’s head of communications.
Those in the industry say they are being unfairly tarred.
“Genuine placement agents and finders often perform a variety of specific services, such as helping to craft marketing materials and presentations to investors,” the SEC’s civil complaint against the two aides said.
“To penalize the whole industry is dramatic,” said one senior executive at a large placement agency, who requested anonymity because he was not authorized to speak to the press. “Why punish the intermediaries?”
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