CalPERS Cuts Ties With PCG

The California Public Employees’ Retirement System announced today that it is dissolving its connections to long-time private equity adviser Pacific Corporate Group, known as PCG.

The nation’s largest pension fund did not explain why it was severing ties with its former adviser. But questions about the relationship have arisen in the wake of a PE pay-to-play scandal that began last year.

Specifically, concerns have surfaced regarding PCG’s relationship with former CalPERS board member turned placement agent Alfred Villalobos. According to an Aug. 19 story in the Sacramento Bee, Villalobos helped PCG in 2007 when CalPERS became worried over the departure of three PCG executives.

Villalobos suggested changes at the firm that helped CalPERS feel more comfortable with PCG. In July, Villalobos stated that PCG owed him $1 million for work he did for the firm, said the article. In 2007, PCG CEO Christopher Bower encouraged CalPERS to invest $600 million in Apollo, which CalPERS did. Villalobos’s commission on the deal was a $13 million commission, said the Sacramento Bee.

A civil complaint filed in May of this year by California Attorney General Edmund G. “Jerry” Brown Jr. has alleged Villalobos and Federico Buenrostro Jr., a former CalPERS CEO, attempted to bribe CalPERS officials into making investments, including with Apollo, from 2002 to 2008.

“We’re not commenting beyond what’s in our press release,” said a CalPERS spokesperson. A PCG spokesperson stated, “Pacific Corporate Group has had the successful opportunity to serve CalPERS as a fiduciary for over 20 years and has generated a net IRR in excess of 23 percent while producing over $3 billion in investment gains to enhance the retirement security of CalPERS beneficiaries.”

A previous joint venture partner with PCG, Aviva Capital LLC, will still run the more than $1 billion of investments and commitments in two emerging markets funds, known as Global Opportunities Fund 1 and 2. Capital Dynamics will take over the management of the $480 million Clean Energy & Technology Fund, formerly run by PCG, which was started in 2007.

CalPERS will maintain an association with a part of the team once known as PCG Corporate Partners, which was headed by managing directors Timothy Kelleher and Douglas Meltzer and ran private equity funds for PCG. The strategy involved making significant, non-controlling investments, typically to finance business expansion. The new spin-out group, KMCP Advisors, presumably run by Kelleher and Meltzer, will manage what remains in the two Corporate Partner funds.

PCG had been an adviser to the CalPERS private equity program since its formation in 1990.