LPs Want Answers From Aldus After Alleged NYSCRF Kickbacks

At least three clients of Aldus Equity Partners are expressing concerns about the Dallas-based advisory firm’s connection to the alleged kickback scheme stemming from the emerging manager program it runs for the $120 billion New York State Common Retirement Fund. Mainly the questions center around why the firm hired a “finder,” even though it already served as a consultant to the pension fund, and its apparent decision to bow to pressure to steer money to certain fund managers, including Falconhead Capital LLC.

The complaint filed by the Securities and Exchange Commission on March 19 alleges that Henry Morris, chief fundraiser for Alan Hevesi, the former New York state comptroller, and David Loglisci, the former CIO of NYSCRF, recruited Aldus Equity to manage the limited partner’s emerging manager portfolio and then informed an unnamed Aldus Equity managing partner that the firm must first retain Morris as a “finder,” before receiving commitments from the state. The partner allegedly agreed that Aldus Equity would pay Morris after it became clear that the firm would not be hired by the LP unless it did so, according to the complaint.

For its part, Aldus Equity noted the allegations center around the conduct of Morris, an independent placement agent it terminated in 2006, and that the firm itself isn’t facing any charges.

James Wilbanks, executive secretary of the $9 billion Teachers’ Retirement System of Oklahoma, told Buyouts that the board is concerned and has elevated Aldus Equity on their watch list from “on alert,” where it was placed when a partner left a few months ago, to “on notice” for six months. The board told Wilbanks, their counsel and their consultant, to examine the information in the filings and to bring the board a recommendation within six months on what should be done with regard to their relationship with Aldus Equity.

“The range of outcomes could be anything from the conclusion that Aldus was an innocent bystander that happened to get caught up in this,” said Wilbanks, “and therefore we recommend continuing the relationship, to they were a willing participant in this and knew what was going on and we recommend termination. The full spectrum of options is available to us.” Wilbanks said the state is going to conduct its own investigation and is not going to draw premature conclusions.

In 2008, the Teachers’ Retirement System of Oklahoma chose Aldus Equity to handle a discretionary separate account mandate of $450 million to be invested in private equity, which was the first private equity mandate for the pension fund. Oklahoma issued its RFP for the mandate in the fall of 2006 but did not make a decision until May 2008.

The New Mexico State Investment Council is also monitoring the situation, as Aldus Equity serves as its private equity consultant. Charles Wollmann, spokesperson, said the state is taking steps to determine the facts about the allegations, and it will act appropriately based on what is learned. New Mexico has already requested additional information from Aldus Equity and its general partners, which it plans to discuss at the next council meeting at the end of April, if not sooner. “It’s too early to say what the possible outcomes might be. It’s a concern, but we don’t want to be premature,” said Wollmann.

The Los Angeles Fire and Police Pensions, or LAFPP, is also on the record as raising its eyebrows as Aldus Equity is one of its private equity advisers too. In an April 2 board document, LAFPP noted five GPs and 10 funds in its private equity portfolio are alleged to have made payments to win business from NYSCRF. In addition to Aldus Equity, LAFPP is connected to the case through its other private equity adviser, StepStone Group. The founders of La Jolla, Calif.-based StepStone were senior executives with the private equity unit of Pacific Corporate Group, which is also mentioned in the SEC complaint, during the time periods in question. LAFPP staff plan to meet with Aldus Equity and StepStone and will report back to the board, although it’s not clear when this will happen or what the possible outcomes might be. Both LAFPP and Pacific Corporate Group didn’t respond to a request for comment. StepStone declined to comment.

The SEC complaint alleges that in May 2004, Aldus Equity signed an agreement to pay Morris 35 percent of the management fees it got from NYSCRF. As a result, Loglisci arranged for the LP to make a $175 million commitment to Aldus/NY Emerging Fund LP, with an additional pledge of $200 million in February 2006. In exchange, Aldus Equity paid $319,374 to Morris, according to the complaint, which goes on to say that in 2005, Aldus Equity was considering a transaction with a large investment bank and the partner “at that point wanted to extricate Aldus from its arrangement with Morris. He was told that Morris could take the retirement fund’s business away from Aldus just as quickly as he had given it to Aldus.”

The complaint also alleges that “Morris and Loglisci also used their leverage with Aldus to extract kickbacks in connection with investment opportunities that fell below the minimum amount required for the Retirement Fund to make a direct investment.” In 2006, Loglisci pressured the unnamed Aldus Equity managing partner to have the emerging fund commit to private equity fund Falconhead Capital Partners LP, after Loglisci had already arranged for Falconhead Capital to pay the sham finder’s fees to Morris in exchange for an investment. Thus Aldus Equity committed $15 million of NYSCRF’s assets to the Falconhead Capital fund in November 2006 and another $15 million in May 2007.

Clarification: Buyouts would like to make clear that the penultimate sentence of this article (Beginning with “In 2006…”) is not meant to imply Falconhead Capital was aware of any arrangements between Logilisci, Searle and Aldus.