The financial adviser to Atlanta’s three pension systems recommended last year that they invest $64 million in a fund his own firm had just created, raising concerns about a conflict of interest.
The story you’re reading is premium content from The Atlanta Journal-Constitution. Subscribers get total access to all our in-depth news, digital editions and exclusive premium content. You can now also buy a 24-hour digital pass or 7-day digital pass.
Read MyAJC.com now — 24-hour digital pass99¢ for 24-hours
Read MyAJC.com all week — 7-day digital pass$3.99 for 7-days
Subscribe to AJC for as little as 33¢ per dayView Offers
AJC Print subscriber — I need to register my account for digital access.Access Digital
AJC Print subscriber — I’ve already registered my account.Sign In
About alternative investments:
Georgia pensions used to be restricted to traditional investments, such as stocks and bonds. But last year, the Legislature loosened the rules to allow for what’s known as alternative investments, such as buying stakes in private companies and employing complex trade strategies such as simultaneously buying and selling assets to profit from price differences.
The city of Atlanta’s three pension boards’ have agreed to invest $64 million in an alternative investment fund created by their adviser. That money is going toward what’s known as a “fund of funds,” a collection of elite, private investment pools. This approach spreads investments across several underlying funds to try to reduce risk.
Here are some basics about such investments:
How do the various funds work? Some “private equity” funds specialize in start-up ventures. Others target mature companies for takeovers or buy distressed and bankrupt firms. Others buy real estate. Hedge fund managers may borrow to supplement investors’ capital and use complex trade strategies, such as betting that a stock will fall in price, known as short-selling.
Why invest in them? The potential for high profits. Such funds may do well through the ups and downs of financial markets. Last year, the best funds averaged returns topping 20 percent, Bloomberg reported.
What are their risks? Fees and expenses are high. With a “fund of funds,” the investor pays the fees and expenses of both the fund of funds manager as well as the managers of the underlying funds. There are no rules on pricing such private funds, so the actual value of the fund may not be known until assets are sold. That may not happen for years, and there are often restrictions on when investors can cash out. Hundreds of private funds closed last year due to poor returns.
Who regulates them? They aren’t subject to some of the investor-protection regulations that apply to mutual funds. New rules require large private funds to provide the Securities and Exchange Commission with information on exposures and risks. The public can’t see that information; it is only available to the government to monitor risks to the financial system. Private funds with less than $150 million aren’t required to file the new reports.
Sources: SEC, Bloomberg, staff research
Where Atlanta’s pensions invested
Atlanta’s three pensions had invested $20 million in their investment adviser’s “fund of funds” by the end of February, which was in turn invested in these six underlying private funds:
Fund,City,Type of fund,Amount
Millennium USA LP,New York,Hedge fund (arbitrage),$5.1 million
Third Point Partners,New York,Hedge fund,$6.3 million
Clearlake Capital,Santa Monica, Calif.,Private equity (buy-outs),$48,882
Edgewater Growth,Chicago,Private equity (start-ups),$2.2 million
Siris Partners II LP,New York,Private equity (buy-outs),$2.5 million
5 Stone Green Capital,Scotch Plains, N.J.,“Green” real estate,$3.0 million
Source: City of Atlanta, Bloomberg, staff research
Gray & Co.’s alternative fund
Atlanta-based Gray & Co., which has 37 employees, provides investment advice on $9.6 billion worth of assets to pension funds and other clients. It also directly manages about $742 million in investments for similar clients, according to regulatory filings. Here’s how it got into managing alternative investments, which promises to become one of its most lucrative businesses:
July 1, 2011: New pilot state law allows Georgia Firefighters Pension to become the state’s first public pension to invest in alternative funds.
Oct. 21, 2011: Gray & Co. launches its first private investment fund, GrayCo Alternative Partners I.
July 1, 2012: New state law allows most of Georgia’s large public pensions to invest in alternatives.
Sept. 11, 2012: Atlanta fire and police pensions agree to invest $15 million and $21 million, respectively, in Gray & Co.’s alternatives fund, to be called GrayCo Alternative Partners II. Gray & Co. is also the investment advisor for the city’s three pensions.
Oct. 4, 2012: Gray & Co. creates GrayCo Alternative Partners II.
Late October, 2012: Gray & Co. buys hedge fund manager Tiburon Capital Management, whose CEO becomes head of Gray & Co.’s alternative investment unit.
Nov. 7, 2012: Atlanta’s largest pension plan, its $1.1 billion General Employees plan, agrees to invest $28 million in GrayCo Alternative Partners II.
Dec. 5, 2012: Some board members at the General Employees pension question the adequacy of Gray & Co.’s disclosure of its financial interests in its alternatives fund. Move to reconsider decision is voted down. One member files complaint with the U.S. Securities and Exchange Commission.
April 1, 2013: Gray & Co. reports assets of $26 million in its first alternative fund and $77.9 million in its second fund.
July 18, 2013: Gray & Co. announces that founder Larry Gray is giving up CEO role but will remain president. To improve management and “support the continued growth of the firm,” Gray & Co. names co-CEOs and promotes Tiburon’s former CEO to be in charge of all investments.
Sources: SEC, Atlanta pension board meeting minutes and other documents, Delaware Division of Corporations, company statements, staff research