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Editor’s Letter: New Jersey’s political-contribution prohibition is harsh — and perfect

New Jersey has an aggressive policy prohibiting investment managers working with the state pension from making political contributions to state officials.

And that’s a good thing.

Violations of the policy can lead to the system ending its relationship with the manager in question. In a recent case, CVC Capital Partners was called out after one of its high-ranking executives, Christopher Stadler, inadvertently violated the policy by making a $2,600 contribution last year to the campaign of two people running for state assembly in New Jersey.

The problem in this situation was that New Jersey’s state pension made a 100 million euro ($111.8 million) commitment to CVC Fund VI in 2013. SIC rules prohibit investment officials from firms working with the state pension from making contributions to state officials. (There are exceptions to the rules.)

The New Jersey State Investment Council chose to grant CVC an exemption from the policy and continue its relationship. Other such relatively minor cases are probably settled in similar fashion because the ultimate penalty — a ban — is so  harsh.

For private equity, this is especially tough because the asset class is so long-lived. LPs sign on for 10 years and a GP depends on each LP to live up to its side of the commitment. When GPs call capital, that money needs to be available for investment.

The way to handle this would be for the LP to sell its interest on the secondary market. But there the institution faces the prospect of having to sell its interest at a discount. This means following the political-contributions policy could cause the system to lose money.

But it’s worth it. In situations where contributions are not inadvertent, where there really is an effort to bring political influence to bear to help the investment manager get money from the pension, that relationship should be terminated.

The recent CVC situation was different from this, and relatively simple to handle. The New Jersey SIC gave CVC a wrist-slap for the inadvertent political contribution made by Stadler.

Stadler, head of North American private equity, rescinded the contribution shortly after it was made. SIC determined that the contribution was inadvertent and it would be in the best interest of beneficiaries to grant CVC an exemption to the policy and continue the relationship.

This was the correct decision — the commitment does not seem like an attempt to buy political influence. But it’s also right that even in this seemingly innocent violation of the rules, the firm has to go through some headaches.

After all, New Jersey investment officials watched as their neighbor in New York descended into scandal and prosecution in 2009 after investigators revealed politics infiltrated the supposedly neutral investment process. In New York, numerous investment firms paid a political fixer “finder’s fees” in exchange for commitments from the state pension fund.

This is why it’s vital to have strong checks against this sort of political influence. Even relatively minor incidents need to be subject to the harshest of penalties (at the discretion of the governing body). No one wants to return to the era of letting politics build private equity portfolios.