Pay-to-Play

REVEALED: Pando smears ex-Carlyle pro Bob Grady

April 17, 2014: 2:30 PM ET

New Jersey investment boss Bob Grady gets attacked for no good reason.

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New Jersey State Investment Council chairman Bob Grady

FORTUNE -- David Sirota of PandoDaily yesterday accused New Jersey State Investment Council chairman Bob Grady of corruption. Sirota didn't use that specific term, but that's the only conclusion one could reach after reading his 1,645 words worth of misdirection, misunderstanding and innuendo. Someone needs to set the record straight, and I don't have any better afternoon plans.

Here's the background: New Jersey native Grady is a longtime Republican operative, first working in state politics before becoming a speechwriter for George H.W. Bush's presidential campaign in 1988. He would go on to serve in various positions within the Bush White House, including as  executive associate director of the Office of Management and Budget. He would eventually leave to join investment bank Robertson Stephens & Co., before joining private equity firm The Carlyle Group (CG) in May 2000. At Carlyle, Grady focused most of his time running the firm's venture capital investment program, which raised several funds. The last of those was in 2006, after which the group eventually morphed into a growth capital business before being shut down completely. Grady would transition into a regulatory role for Carlyle in late 2008, before leaving the firm the following summer to join a Wyoming-based investment firm called Cheyenne Capital. He later would advise old pal Chris Christie on his gubernatorial run, helped manage his transition team and in 2010 agreed to serve as (unpaid) chairman of the state's investment council, which manages public pension monies (Grady also at one point turned down Christie's offer to become state treasurer).

When Grady joined the NJSIC, it already had a pair of legacy investments with The Carlyle Group, both dating back to 2007. One was in a real estate fund, while another was in a mezzanine fund.

What concerns Sirota, however, is what happened late last year, when NJSIC committed $300 million to Carlyle's sixth global private equity fund. Namely because he thinks that Grady stands to benefit financially. He is wrong.

Sirota leads his piece by retelling of the "angry lecturing" he received from Grady, who apparently said that Sirota may not "understand finance." It's too bad that Sirota used this as a straw-man rather than as a cautionary note.

The 'smoking gun' here is that Grady maintains several interests in Carlyle-affiliated structures, as detailed in his New Jersey public disclosure forms:

In 2010, those forms documented Grady's ownership in the Carlyle Global Partners Master Coinvestment Fund; In 2011, Grady listed TCG Holdings, L.P., TCG Holdings II, L.P. and "entities related to the Carlyle Group." In 2012, he listed an ownership stake in "The Carlyle Group and related entities." And in 2013, he listed "Carlyle Global Partner Coinvestment Fund, LP." On all the forms, he lists Carlyle entities as "producing or expected to produce income" for him. Additionally, since 2009, Grady has been a managing director at Cheyenne Capital Fund, which, according to disclosures by the Wyoming Treasurer's Office, also has had an investment stake in Carlyle.

Sirota acknowledges that none of these structures are the same fund into which NJSIC invested $300 million, but then uses all sorts of twisted logic to suggest that the new fund may be used to benefit those other structures. This is where his misunderstanding of private equity comes into play.

For starters, Grady's interests all relate to investments made and funds raised while he was still employed by Carlyle (i.e., pre-2010). The vast majority of those deals have been liquidated and the rest are being slowly sold off. In other words, they are old legacy positions (this includes the Cheyenne investments, which were made in 2005 and 2007). Moreover, he has no economic interests in any Carlyle investments made since his departure from the firm, nor does he hold any Carlyle Group stock (the firm went public in late 2012).

Sirota's argument is that some of the new $300 million could be used to effectively purchase companies from those old portfolios, in what apparently would be private equity's version of a Ponzi Scheme. He even finds an anonymous private equity executive to say that such transactions "happen all the time." I can't speak to Sirota's source, but can say with confidence that he either was wrong or misinterpreted. Private equity firms rarely cross-invest between funds, namely because it is extraordinarily messy (or "arduous," as a Carlyle spokesman put it to Sirota). Each fund has its own management committee and investment advisory board, and thus its own fiduciary duty. Just about the only time you ever see it happen is if a portfolio company needs follow-on capital but the fund has run dry, although even then it's highly unusual. For example, my understanding is that Carlyle has only done such a thing twice in its history -- and this is a firm that has made hundreds, if not thousands, of investments. Moreover, none of the investments made so far out of Carlyle's new fund are of this variety.

It's also worth noting that Carlyle wasn't exactly so desperate for fund commitments that it would bend over backwards to indirectly bribe a volunteer New Jersey official. The firm originally only sought to raise $10 billion for its new buyout fund, but ended up at $13 billion. In other words, it had plenty of demand and New Jersey contributed just 2.3% of the total raise. Is its plan to breach fiduciary duty to the other 97.7% in order to help up one limited partner? Pretty serious suggestion, for which Sirota has no evidence.

Sirota then goes for more professional backup, quoting former SEC investigator Ted Siedle:

"Recusal is meaningless in the context of private equity investments like this," Siedle told Pando. "Private equity deals often treat different investors differently so that one investor may receive compensation and fees from the funds invested by another investor. In this case, it is possible that the fees New Jersey's pension fund is paying to one Carlyle fund may be able to be credited to another investor in his own Carlyle holdings."

He also quotes from a Siedle investigation into practices at the Rhode Island State Treasury, which was critical of increased investments in hedge funds and private equity. Three notes on this: (1) Siedle's quote is unintelligible. I mean it sounds bad, but is total gibberish. I dare you to make sense of it. (2) Sirota neglects to mentioned that Siedle has received compensation for some of his Rhode Island work by a public employees union critical of Rhode Island Treasurer Gina Raimondo's various pension reforms. (3) Most of Siedle's work cited by Sirota deals with hedge funds, not private equity funds (they are not at all the same thing, despite both being classified as "alternative investments"). Same goes for a Gretchen Morgenson piece he links to that is critical of fund fee structures. Yes, Carlyle does also manage hedge funds (a relatively new business for the firm), but that isn't what NSJIC invested in. Moreover, Sirota never notes how investors in three of Carlyle's last four buyout funds more than doubled their money (after fees were accounted for), or NSJIC's returns on the two legacy Carlyle funds it holds (the combined $207 million investment -- including fees -- was valued at $239 million through 2/13).

Sirota also cites Carlyle's past history with public pension kickbacks -- through an affiliate with which Carlyle has since cut ties -- without providing a shred of evidence that such a thing happened with Grady in New Jersey (character assassination by association). As someone who arguably covered those kickback scandals more in depth than any other reporter, this just isn't the type of way they went down (bribing middle-class public employees via third-party placement agents).

Finally, near the end of his piece, Sirota writes:

Toward the end of my call with Grady, I pushed him to explain why the Christie Administration will not release the text of New Jersey's partnership agreement with Carlyle. Don't taxpayers - and, in particular pensioners – have a right to see the terms of the agreements being made in their name and with their money? And wouldn't transparency clear up questions about potentially huge conflicts of interest and self dealing?

Perhaps, but the Christie Administration also would be in violation of the confidentiality agreements, and therefore would be liable for the breach. I'm all for greater transparency, but I'm not sure what within the limited partnership agreement would either confirm or reject Sirota's suspicions.

The simple reality is that there is no scandal here. Bob Grady has publicly disclosed all of his financial interests to The Carlyle Group, and even laid out his work history on a LinkedIn profile. If he was trying to hide something, he has a funny way of going about it.

David Sirota apparently reached a conclusion based on those documents, and built a story around them. Mitigating facts be damned. All it "revealed" was shoddy journalism.

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