NY State Teachers’ chose secrecy in secondaries advisory contract

Some public pensions appear to think any sunlight allowed on their private equity decision-making processes would cause irreparable damage to their ability to continue investing in the asset class.

New York State Teachers’ Retirement System chose an internal, non-public process to hire an adviser to help it run a billion-dollar secondaries sale process, which it felt was in the best interest of beneficiaries and other constituents.

The system is out of step with other large public systems in the US, several of which have held RFP processes to hire secondaries advisers. Such contract awards should always be as transparent as possible, with multiple bidders and input from the public. Open processes ensure that all constituents have an understanding of the work taking place and the costs involved.

Some public pension systems seem to think any sunlight allowed on their private equity decision-making processes would cause irreparable damage to their reputations and/or their ability to continue investing in the asset class. It has never made much sense to me.

NY State Teachers last year hired boutique advisory shop Mozaic Capital Advisors based on internal vetting by investment staff. This was the same adviser the system hired in 2019 to run another secondaries sale, based on the same internal selection.

Let me be clear, my issues with the system have nothing to do with Mozaic, which has quietly been winning mandates in a field full of big hitters like Evercore and Jefferies.

And the system’s selection process was fine based on state administrative policies, which allow investment contracts to be awarded outside the state’s normal controlled process for acquisition of materials and services.

But the lack of public bidding for the contract was different from other large public systems in the US, which generally hold public request-for-proposal processes to try and nail down the best price for the work. Connecticut’s state pension system, for example, just ran an RFP process earlier this year after which it selected Mozaic to help it run a secondaries sale. The system disclosed details of the range of fees it would be charged for the work from its various bidders (though not the exact fee from Mozaic), and the presentation from Mozaic.

The teachers’ pension staff believed a public process could negatively impact pricing, according to a spokesperson.

“Conducting a public RFP for these kinds of services has the potential to negatively impact ultimate sale price of the partnership interest in these types of transactions,” the spokesperson wrote in an email response to questions from affiliate title Buyouts.

The system said its private equity team conducted informal interviews with brokers and other secondaries professionals ahead of its first work with Mozaic, which ran an $800 million sale for the system in 2019. “For our 2021 sale, the PE team conducted similar updated diligence considering a number of items, including pricing, and decided to use the same firm again,” the spokesperson said.

The system denied my open records request for the fee it paid Mozaic for both jobs, citing exemptions for trade secrets that if disclosed, “would cause substantial injury to the competitive position of the subject enterprise”, according to the system’s denial letter.

Keep in mind, I was only looking for the fee the system would pay for the work: “The records you request include a compilation of information used in Mozaic’s business that
provides an advantage over competitors and the disclosure of this trade secret will cause substantial injury to Mozaic’s competitive position in the market. The Requested Records include confidential, proprietary information regarding the economic, tax and financial terms that have been uniquely designed and negotiated by Mozaic to create an efficient and advantageous secondary transaction service for investors,” according to the denial letter.

It’s particularly curious for a New York public institution to do anything outside of a public process, considering the jaded history the state has with private equity. New York State Common Retirement Fund was ground zero in the infamous pay-for-play scandal back in 2009-2010. In that case, several state officials were charged by federal investigators and sentenced, including former Comptroller Alan Hevesi, in a scheme to illicitly charge GPs fees in exchange for commitments. The US Securities and Exchange Commission sanctioned several private equity firms as part of the investigation.

With that sort of history in the state, one might expect a fully transparent public RFP process in choosing an adviser to help run a sale of billions of dollars in fund stakes. Instead, the system chose secrecy.

Chris Witkowsky is editor of affiliate title Buyouts.