Wheeler’s Top PERS Private Equity Firm Has Earned $125M While Paying $30M SEC Penalty

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Wednesday, March 02, 2016

GoLocalPDX News Team with Kate Nagle and Brendan Murray

Under Ted Wheeler’s tenure as Oregon's Treasurer, Wall Street private equity funds have made billions managing the state's Public Employees Retirement System (PERS).  One firm, Kohlberg Kravis Roberts & Co. (KKR) has received more than $125 million in fees from Oregon between 2010 through 2014, according to State data.

KKR is not without controversy.  In 2015, the firm was charged by the U.S. Securities and Exchange Commission (SEC) for breaking its fiduciary responsibilities.

KKR is the fourth largest private equity firm in the United States with $98.6 billion under management, according to Pension and Investment magazine. The firm's two managing partners are both on the Forbes 400 list of the richest people in America. George Roberts and Co-Chair Henry Kravis are both ranked #108, each with a net worth $4.2 Billion.

Wheeler believes that KKR has been a great investment for Oregon PERS and defends the investment in the firm.

KKR Pays $30 Million Penalty

KKR was hit hard by the SEC last year for “misallocating more than $17 million in so-called 'broken deal' expenses to its flagship private equity funds in breach of its fiduciary duty.”  

“This is the first SEC case to charge a private equity adviser with misallocating broken deal expenses,” said Andrew J. Ceresney, Director of the SEC Enforcement Division in a release from the agency.  “Although KKR raised billions of dollars of deal capital from co-investors, it unfairly required the funds to shoulder the cost for nearly all of the expenses incurred to explore potential investment opportunities that were pursued but ultimately not completed.”

In the settlement with the SEC, “KKR neither admitted nor denied the SEC’s findings,” said the release from the agency, but “KKR consented to the entry of the SEC’s order finding that the firm violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7.  KKR agreed to pay more than $14 million in disgorgement ($3.26 million was previously refunded to clients) as well as more than $4.5 million in prejudgment interest and the $10 million penalty.” 

Wheeler Defends KKR

Wheeler defends the investment in KKR. Wheeler’s office responded to questions about the fees paid to KKR, “The firm is considered one of the preeminent industry leaders in the private equity world, and that investment relationship has been highly lucrative and has generated billions in returns for Oregon beneficiaries over time.”

Wheeler’s investment in KKR takes two paths. KKR has been paid over $80 million in fees under private equity, the most paid in fees to any one firm by the state.  The firm receiving the second largest amount of fees is another KKR investment -- KKR Financial Credit Portfolio. That fund has been paid over $45 million in fees.

“During the Wheeler administration, Oregon has adopted a strategy to deliberately diversify the portfolio not just among more asset types, but also to diversify further among managers in those asset classes. The practical impact of that is that while KKR remains an important and innovative partner in Oregon investments, the firm is managing a progressively smaller share of Oregon’s pension fund,” said James Sinks from Wheeler’s office.  Wheeler did not respond to any of the questions.

In reviewing fees paid to KKR during Wheeler’s tenure, they remained functionally stable -- and the New York firm made as much as $29 million in a single year.

Has Wheeler’s investment strategy been successful — read tomorrow’s piece on the Oregon PERS performance and Wheeler's leadership.

READ THE SEC ACTION AGAINST KKR

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