Key Takeaways
- • Kentucky Retirement Systems (KRS) approved a $200 million investment in the startup hedge fund Arrowhawk Capital Partners weeks after trustee Chris Tobe, the only committee member with investment experience, was removed from the investment committee, per The Intercept's reporting.
- • Placement agents were paid nearly $12 million between 2004 and 2009 to steer KRS business, according to a state auditor probe, which found seven money managers paid placement agent Glen Sergeon a combined $5.6 million.
- • KRS's alternative allocation reached 29 percent of its assets, well above the national average, while management fees rose from $13.6 million in 2009 to $126 million five years later, per a KRS-commissioned study.
- • By 2016, Kentucky's pension system was funded at 37.4 percent of its obligations, the lowest in the nation according to Standard & Poor's, versus a national median of 74.6 percent.
- • The study found KRS would have earned an additional $1.75 billion had it matched the median pension fund's returns over the five years ending December 2014, versus its alternatives-heavy strategy.
Summary
The Intercept's investigation examines how Kentucky's public pension systems, including the Kentucky Retirement Systems (KRS), came to rely heavily on hedge funds and private equity, and how placement agents played a role in those allocations. In April 2008, investment adviser Chris Tobe joined the KRS board of trustees and, within a year, was named to the six-member investment committee. He was later removed after raising questions, and weeks afterward the remaining committee approved a $200 million investment in Arrowhawk Capital Partners, a new fund whose first investor was KRS. Tobe learned of the deal only after the fact, through Pensions & Investments. An internal audit in 2010 revealed that Arrowhawk paid more than $2 million to placement agent Glen Sergeon to secure Kentucky as a client. KRS's chief investment officer resigned during the investigation, and Arrowhawk shut down two and a half years after its selection.
According to a subsequent state auditor probe, seven money management firms paid Sergeon a combined $5.6 million to win KRS business, including $1.1 million from Crestview Partners. The auditor's review found placement agents were paid nearly $12 million from 2004 to 2009 and secured $1.3 billion in investments. The Park Hill Group, a Blackstone subsidiary until 2015, collected $3.8 million in fees from 2005 to 2008. The Intercept notes that placement agents are legal in most states provided they do not make prohibited payments to officials.
Despite these problems, KRS increased its alternatives exposure. The planned 5 percent allocation to hedge funds doubled to 10 percent, and private equity commitments grew. Today 29 percent of KRS assets are in alternatives, according to the report. Richard Robben, KRS interim chief investment officer, defended the approach as diversification for a $17 billion fund. The Intercept reports that fees, typically "2 and 20," rose sharply, and a KRS-commissioned study found the pension would have earned $1.75 billion more had it matched the median pension fund over five years ending December 2014. KRS trimmed hedge fund holdings only in 2017 but continues investing in private equity.
The article also places the crisis in a broader political and economic context, citing state budget shortfalls and legislative gridlock. Funding for city and county workers' pensions fell from 59.7 percent in 2015 to 51.6 percent in 2017, and the state employees' plan fell from 21.9 percent to 16.3 percent over the same period. The report attributes the shortfalls primarily to government underfunding rather than poor investment performance, though critics including Tobe argue political corruption and placement agent influence compounded the problem.
According to a subsequent state auditor probe, seven money management firms paid Sergeon a combined $5.6 million to win KRS business, including $1.1 million from Crestview Partners. The auditor's review found placement agents were paid nearly $12 million from 2004 to 2009 and secured $1.3 billion in investments. The Park Hill Group, a Blackstone subsidiary until 2015, collected $3.8 million in fees from 2005 to 2008. The Intercept notes that placement agents are legal in most states provided they do not make prohibited payments to officials.
Despite these problems, KRS increased its alternatives exposure. The planned 5 percent allocation to hedge funds doubled to 10 percent, and private equity commitments grew. Today 29 percent of KRS assets are in alternatives, according to the report. Richard Robben, KRS interim chief investment officer, defended the approach as diversification for a $17 billion fund. The Intercept reports that fees, typically "2 and 20," rose sharply, and a KRS-commissioned study found the pension would have earned $1.75 billion more had it matched the median pension fund over five years ending December 2014. KRS trimmed hedge fund holdings only in 2017 but continues investing in private equity.
The article also places the crisis in a broader political and economic context, citing state budget shortfalls and legislative gridlock. Funding for city and county workers' pensions fell from 59.7 percent in 2015 to 51.6 percent in 2017, and the state employees' plan fell from 21.9 percent to 16.3 percent over the same period. The report attributes the shortfalls primarily to government underfunding rather than poor investment performance, though critics including Tobe argue political corruption and placement agent influence compounded the problem.
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