I’m still trying to digest everything from Andrew Cuomo’s announcement regarding The Carlyle Group, which has agreed to repay $20 million and sign a “code of conduct.” Here are my gut reactions, which I hope to refine later today:
* Cuomo is kidding himself, if he truly believes that his “code of conduct” will be adopted by the private equity market at large. First, it is obvious that Carlyle only adopted it under duress. Second, Carlyle did not agree to apply the code’s principles outside of the U.S. (i.e., outside of Cuomo’s jurisdiction). Third, most firms do not have the in-house resources of a Carlyle, which negates the possibility of following its lead vis-a-vis not using placement agents. Moreover, this isn’t a high school sport where the freshman follow the senior captain’s example. Private equity firms — big and small — pay attention to Carlyle, but don’t necessarily try to mimic it.
* The $20 million is a slap on the wrist. Here’s some context: Carlyle co-founder David Rubenstein paid more than $20 million for a copy of the Magna Carta (which he’s loaned to The National Archives).
* The $20 million isn’t even a real slap, because everyone is calling it a “payment” instead of a “fine.” If Carlyle is repaying ill-gotten gains (even if the ill was caused by someone else), why repay so little of them? Imagine I steal a diamond bracelet and give it to my wife, without telling her of its origins. When the police come knocking, she can’t keep some of the diamonds for herself, even though she wasn’t the bad actor.
* Carlyle stresses that it has not been accused of, or admitted to, any wrongdoing. However, when Cuomo was asked about the various responsibilities of Carlyle and Riverstone, he said that “most of the objectionable activities were by Riverstone.” So, who were “less of the objectionable activities” done by? And what would have happened to Carlyle had it not reached this agreement (which happens to shield it from criminal prosecution in NY)?
* Where were the internal controls at Carlyle Group? If the firm was having trouble getting a commitment from NYSCRF, but then had those problems alleviated by Morris — did no one notice the red flags that such a “fixer” should have sparked?
* Carlyle has been weaning itself off the Riverstone relationship for a while, but now might be prepping for a quickie divorce. Maybe it’s just waiting for formal charges to be filed against Riverstone and/or David Leuschen.
* This entire code of conduct related to GP behavior, but there is nothing about pension fund behavior. Remember, this problem was caused by corruption inside NYSCRF.
* What will happen if Fund A uses a placement agent to call Hamilton Lane (NYSCRF’s gatekeeper — which currently has a different boss than the one on charge during the Hevesi era), because Hamilton Lane represents a non-NY pension fund. Hamilton Lane takes the meeting, and thinks: “Hey, this might also be a good investment for NYSCRF.” Is it allowed to present the opportunity?
* The political contribution ban is welcome, and should be immediately copied by other states. Assume existing donations are grandfathered in.
* This is not over, and it’s not limited to New York.