CalPERS Controversy Not The First for Apollo’s Black

NEW YORK (Reuters) – An investigation by California’s giant public pension fund into fees paid by outside money managers is raising new questions about Leon Black’s private equity firm Apollo Management.

The last time the billionaire investor was swept up in a major controversy was in the 1980s. As a senior banker at Drexel Burnham Lambert and long-time lieutenant to junk bond king Michael Milken, Black saw a massive fraud investigation lead to the collapse of the securities firm and the jailing of Milken.

But Black, 58, emerged unscathed from the Drexel imbroglio, founding Apollo in 1990 and growing it into one of the largest private equity firms in the world with more than $38 billion under management.

Now, almost two decades later, it is Black’s own firm that is caught up in a major probe as California Public Employees’ Retirement System, known as Calpers, examines why and how payments were made to a middleman.

The biggest U.S. public pension, which announced the probe on Wednesday, listed several of Apollo’s funds as having paid fees to ARVCO Financial Ventures, a firm headed by former Calpers board member Al Villalobos. [ID:nN14249876]

“Criminal and even civil issues that raise questions regarding the integrity of money managers can be devastating to their ability to access institutional money,” said Edward Siedle of Benchmark Financial Services, a former SEC attorney who investigates pension fund fraud.

Calpers said it has notified the U.S. Securities and Exchange Commission and California’s top law enforcement officer of its probe. Neither Black nor Apollo has been accused of any wrongdoing.

A spokesman for Black declined to comment for this article.

HARD TIMES

Calpers said its probe started after investment funds recently reported paying more than $50 million in fees over a five-year period to ARVCO.

Black has been expanding Apollo’s reach rapidly in recent years, doing a series of huge leveraged buyouts and raising big money from pension funds and other investors.

Over the course of three days in December 2006, at the height of the private equity boom, Apollo announced deals worth more than $23 billion, snapping up real estate company Realogy Corp and teaming up with TPG [TPG.UL] to buy Harrah’s Entertainment Inc, the world’s largest casino operator.

But a number of the deals have soured badly. Companies were loaded up with massive amounts of debt through the leveraged buyouts just as the U.S. economy was about to get slammed by the financial crisis and resulting recession.

Apollo’s Linens ‘n Things filed for bankruptcy protection as sales slumped, Harrah’s has struggled with its debt load and Realogy has had to deal with the gloomy real estate market.

Black, an avid collector of archaic Chinese bronzes and Old Master drawings, has seen his personal fortune slide as well, falling to a net worth of $2 billion in the Forbes 2009 ranking of the richest Americans from $4 billion in 2007.

But the depressed markets may also provide an opportunity for Apollo, which has built a reputation as shrewd investor in distressed assets.

“They have had some egg on their face from the most recent deals,” said Steve Kaplan, a University of Chicago business school professor. “But there is a belief that the market we are in right now, with distressed properties, is where they are most effective.”

Indeed investors, including Calpers, helped Apollo raise a $14.8 billion fund in December last year, at a time when raising new funds was hard for private equity firms.

In late January, Black said about 20 to 25 percent of the fund, which took about 16 months to raise, was already invested, mostly in credit.

SENSE OF INVULNERABILITY

One longtime associate said that over the years, Black, who graduated summa cum laude from Dartmouth College in 1973 and received an MBA from Harvard Business School two years later, may have developed a sense of invulnerability that comes with hitting it big on Wall Street.

“It is not bad,” the person said, who did not want to be identified to protect their relationship. “It is just that you are now up at that level trying to get transactions done in one form or another, and you sometimes don’t see the forest for the trees.”

Black grew up in an affluent family in Manhattan, but his life has not been without its share of tragedy.

In 1975, while the financier was still at Harvard, his father, Eli Black, committed suicide by jumping from his 44th floor office in the Pan Am building, now known as the MetLife building, in Manhattan.

The senior Black was chairman of United Brands Co, whose involvement in a major Honduran bribery scandal led to the enactment of the U.S. Foreign Corrupt Practices Act. The scandal involved payments by United Brands to government officials in Honduras to reduce taxes on bananas. The company changed its name to Chiquita Brands International Inc (CQB.N) in 1990.

However the Calpers scandal plays out, a taint could threaten Apollo’s access to funding in the future.

“It certainly can’t be good for your reputation,” said Kaplan. “But at the end of the day, what affects their reputation is how well the funds do.” (Reporting by Steve Eder and Paritosh Bansal; Editing by Gary Hill)