TRENTON – New Jersey investment officials are already in the spotlight over ethics questions about the possible role of political influence in the awarding of pension investment contracts. Yet New Jersey’s Division of Investment, which manages the state’s $80 billion pension fund, is considering investing additional dollars in a fund whose executives made major contributions to the Republican National Committee, which backed Gov. Chris Christie's election campaigns.
The proposal, announced at an open meeting of the State Investment Council on Tuesday, drew scrutiny from some Council members who said they were worried the move could pose new legal liabilities. The council oversees the division’s investment of state pension money.
At the hearing in the State Museum’s auditorium, the investment division announced its proposal to invest $100 million in Hellman & Friedman Capital Partners, a private equity firm in which New Jersey already invests. The private equity investment falls into the group of “alternative” funds, including venture capital funds, hedge funds and real estate funds, that the state is increasingly tapping for its pension strategy.
Thomas Byrne, the council’s vice chairman, voiced support for the investment and called Hellman & Friedman “perhaps the top firm in our best-performing asset class.”
But Adam Liebtag, who represents the labor federation AFL-CIO on the council, raised concerns that at least two of the firm’s investors had donated to the Republican National Committee, which spent heavily in New Jersey to support Christie's campaign. Patrick Healy, the deputy CEO, gave $7,500 in 2012, while Erik Ragatz, a managing director, donated $30,800 two years ago, according to a search of campaign finance records.
Liebtag said he was uncomfortable pursuing the Hellman & Friedman investment until the council could verify that the donations don’t violate state “pay-to-play” laws, which aim to keep political considerations out of state investment decisions. The rules are designed "to ensure that the selection of investment management firms to provide investment management services to [New Jersey] is based on the merits of such firms and not on the political contributions made by such firms.”
New Jersey officials recently sold off a $15 million pension investment with links to a Republican political donor, but the Department of Treasury is still investigating whether the state's choice of investor broke pay-to-play rules.
Liebtag said that, given the ongoing Treasury investigation, making the Hellman & Friedman investment now could compound any perception that political interests influence the state’s decisions. “I’m concerned with moving forward” at this point, he said at the meeting.
Christopher McDonough, director of the state’s investment division, said the donations don’t pose a problem, since payments to national Republican and Democratic campaigns are not prohibited; donations to state parties or politicians, however, are. He said investment firms aren’t required to disclose those national connections to the state.
“I can’t say I understand the rationale … of holding off on what has clearly been a very successful investment previously for the division for donations that are clearly not covered by the regulations,” McDonough told the council members.
According to New Jersey law, however, firms or individuals could indirectly violate the regulations if they made payments to “a Federal party committee or other political committee or organization for the purpose of influencing State or local elections.”
Robert Grady, the council’s chairman and one of Christie’s key advisers, said the investment division will be allowed to pursue the Hellman & Friedman deal, which could close within the next 30 to 60 days. In the meantime, the division will provide the council with its due diligence report, which should address concerns about the political contributions, he said.
Earlier in the meeting, McDonough confirmed the sale of the state’s $15 million stake in a General Catalyst venture capital fund, which was first reported Monday. He said the investment division was approached by “a party” interested in acquiring the portfolio and put out a bid to multiple prospective buyers. Washington University won out, and the sale netted the state nearly 1.5 times the original cost of the investment.
The General Catalyst fund is under scrutiny following reports that the state’s 2012 investment came just months after Charles Baker, the firm’s executive -- and now a Republican candidate for Massachusetts governor -- made a $10,000 contribution to the New Jersey Republican State Committee.
At the Tuesday meeting, Grady said General Catalyst had failed to list Baker as an “investment management professional” on its disclosure forms, which would have alerted the state to potential political concerns.
The treasury has not completed its investigation, Grady said, but that if the review did find a pay-to-play violation, one of the ways the state could address that concern is by selling off the stake. “And the position has now been sold,” he said.
The council and investment division continued to defend their investment strategy, touting returns of 16.9 percent for the previous fiscal year -- the state’s second-highest return in 16 years, McDonough said. The state originally reported a return of 15.9 percent; even the higher rate would still lag the S&P 500 for the period.
Council members also defended the higher fees that New Jersey’s pension fund is paying to major financial institutions for managing the “alternative” investments. Between 2009 and 2013, the state has paid almost $1 billion in fees to Wall Street, according to an ongoing investigative series by the International Business Times. In all, New Jersey now spends roughly a quarter-billion-dollars more each year on financial fees than it did before Gov. Christie took office.
Guy Haselmann, a Christie appointee, said that most of those fees are based on incentives: Financial managers must earn a 6 to 8 percent return on investment before they can collect an incentive-based fee, he said. “I don’t mind paying somebody an incentive after they’ve made me money,” he told the council. “You’re hiring somebody who is truly an [expert] in a certain area to pay for that expertise.” He added, “I hope we pay more fees.”
Haselmann later blasted an AFL-CIO ethics complaint against Grady as “disgraceful.” The labor union last week asked the State Ethics Commission to investigate the state’s investing of pension money into financial firms whose executives made donations to Republican political groups.