Sparks fly, tempers flare as LA City halts search for new PE consultant

Los Angeles City Employees’ Retirement System pulled the plug on its 10-month search for a consultant to its $1.5 billion PE program after its July 11 board meeting fell into a rhetorical gutter.

Board Member Nilza Serrano accused a finalist for the consulting contract, incumbent Portfolio Advisors, of willfully misrepresenting its track record and being fired from a separate advisory contract it had with Pennsylvania Public School Employees’ Retirement System. Both of Serrano’s assertions are highly disputable.

“Commissioner Serrano’s statements reflect her own personal beliefs and were not made on behalf of the Board. Portfolio Advisors has requested and has been invited to attend a future Board meeting to respond to Commissioner Serrano’s comments and clarify their response to our request for proposal,” LACERS General Manager Tom Moutes said in a statement.

The other finalist to be LACERS’s consultant, TorreyCove Capital Partners, was deemed not to possess “the capabilities of handling our fund” by a separate board member who did not identify herself in an audio recording of the meeting.

“TorreyCove has approximately $55 billion of assets under advisement and advised clients on $73 billion in capital commitments. Further, we work with 11 of the top 50 U.S. public pensions,” President and CEO David Fann said in a statement.

LACERS’s investment staff had toggled back and forth in recommending one firm over the other throughout the RFP process, three sources told Buyouts. The firms’ respective track records weren’t considered until the final stages, much to the consternation of the $15.3 billion retirement system’s board members.

“Overall, I feel very uneasy and dissatisfied with this RFP process,” said one board member, who wasn’t identified, in a recording of the meeting. “I don’t feel comfortable voting for either of these firms.”

Other board members shared that sentiment and, at the conclusion of the meeting, tasked staff with restarting the search process for a new consultant. A new “request for proposals” to fill the private equity consultant role could take as much as a year to complete, two sources with knowledge of the retirement system told Buyouts.

The board also asked to extend Portfolio Advisors’ existing consulting contract for another year. The board will vote on that proposal at a later meeting.

Given the tenor of the July 11 meeting, Portfolio Advisors is unlikely to re-up as a consultant to the city’s PE program.

“The RFP process has been far more time-consuming and contentious than we expected and, as a result, we’re unlikely to participate in the renewal,” Brian Murphy, managing member and managing partner of Portfolio Advisors, told Buyouts.

“They’ve invested in the vast majority of what we’ve recommended,” he added. “In this case, this commissioner disagreed with what was going on.”

LACERS CIO Rodney June did not respond to multiple requests for comment.

Serrano’s allegations

In the meeting, Serrano alleged that Pennsylvania PSERS fired Portfolio Advisors earlier this year.

In fact, Portfolio Advisors was never terminated by Pennsylvania PSERS, Director of Government Relations Antonio Parisi told Buyouts. Rather, the firm’s third five-year contract with the $52 billion public pension had expired and the Pennsylvania PSERS board opted to hire Pennsylvania-based Hamilton Lane after requesting bids from a variety of firms.

“That’s a consideration, all things being equal. We try to give a shot to Pennsylvania-based companies,” Parisi said.

Serrano was also troubled that Portfolio Advisors excluded the Pennsylvania PSERS portfolio, along with some other co-investments and assets that could be “double-counted,” from the track record it provided in its submission. Portfolio Advisors noted those exclusions in its submitted materials, which were consistent with those submitted when it won its initial contract with LACERS in 2013.

“I just think we as trustees need to make sure we’re looking at complete information,” Serrano told Buyouts. “When we ask a respondent of an RFP for what we want, they have to provide exactly what we ask.”

However, the anomalies of the Pennsylvania PSERS program make for a difficult apples-to-apples comparison with other Portfolio Advisors clients — including LACERS — according to the firm’s submission. Pennsylvania PSERS requires its fund managers to give the pension a seat on their funds’ limited-partner advisory boards, as well as to provide specific loss-protection measures that aren’t required by the firm’s other clients.

Those requirements narrow the pool of funds to which Pennsylvania PSERS can allocate capital, which shifts its portfolio’s return profile.

As a result, excluding Pennsylvania PSERS effectively boosts Portfolio Advisors’ overall returns compared with those of TorreyCove. In the meeting, LACERS staff noted that the Pennsylvania PSERS portfolio’s inclusion likely would have made the firms’ respective track records appear more similar.

It’s unclear whether the dustup around LACERS’s private equity consultant RFP will have any effect on its ability to hire outside firms in the future. For now, it appears as though the retirement system and Portfolio Advisors will be working together for at least a few more months.

“We just have to work with them as best as possible. I’m hoping that based on our concerns that they’d be open and transparent with us,” Board Member Cynthia Ruiz told Buyouts. “I’m going to give us the benefit of the doubt.”

Action Item: For more information on LACERS, visit www.lacers.org/

People walk on the boardwalk, a popular tourist destination, in Venice, California, on Nov. 7, 2014.  Photo courtesy Reuters/Jonathan Alcorn