Pension Benefit Guaranty Corporation’s (PBGC) first foray into alternative assets has been scuppered by an ‘inappropriate relationship’

by Dami Sogunro

  • 20 Aug 2009
  • PE

PBGC cancelled three consulting contracts worth USD 2.5 billion in the tail end of July. The government agency, which was planning on making investments in private equity funds, has revoked the mandates it had awarded earlier in the year to Blackrock Alternative Advisors, Goldman Sachs Private Equity Group and JPMorgan Asset Management. Following an RFP issued in Q3 2008, PBGC awarded USD 900 million each to Blackrock Alternative Advisors and JPMorgan and USD 700 million to Goldman Sachs Private Equity Group in December 2008, with the commitments to be split between real estate and private equity fund investments.

PBGC has been looking to become an institutional investor in private equity ever since September 2006, when it was set to issue an RFP as it prepared to auction off USD 1 billion worth of private equity fund stakes it acquired when United Airlines and US Airlines defaulted on their pension obligations in 2005. About USD 700 million of the potential offering was from United’s fund stakes with the remainder coming from US Airlines. In 2007, PBGC decided that it was not going to sell the fund interests after all. It found them to be high quality investments and of value to the agency.

PBGC scrapped these contracts it awarded in 2008 as it believes former director, Charles Millard, may have acted inappropriately before awarding the mandates. Issues with unprofessional relationships, emails sent between Mr Millard and key executives at the aforementioned firms whilst PBGC was in the process of evaluating their proposals, and the RFP having unusual prerequisites bring doubt to the authenticity of these firms securing the mandates on a fair and competitive basis. As a result of communicating with these firms during the bidding process, Mr Millard was in violation of the prohibition of contact with firms that have formally bid for a mandate. A review of PBGC’s appointment process found that just days before the RFP was issued, Mr Millard had discussed ideas with an executive at JPMorgan about what kinds of questions to put in the RFP. It should be noted that the review found no wrong doing on the part of those who had bid for the mandate.

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