Copyright 2003, San Jose Mercury-News

Political figures on CalPERS board benefit from ties with `middleman'

By Matt Marshall

There's a tangled web of relationships between some of CalPERS' most powerful board members and the venture capital funds that receive CalPERS' investments through a middleman, Grove Street Advisors.

Grove Street Advisors, a consultant firm, has committed $2.9 billion of CalPERS' money into 150 venture capital funds. CalPERS has so far resisted the release of the financial performance of those funds -- which are among the worst performing and most risky.

The multiple and complex ties between some managers of Grove Street's funds and CalPERS' board members may raise questions. CalPERS board members, however, say the ties -- which include some political campaign contributions -- are disclosed in such a way that they do not comprise conflicts of interest.

Many of the managers of the 150 VC funds have donated money to the campaigns of the two publicly elected officials -- state Treasurer Phil Angelides and Controller Steve Westly -- who have seats on the CalPERS board by virtue of their state positions.

Angelides and Westly both have voting rights on CalPERS' largest investment decisions, and have the right to recommend to CalPERS staff that they consider investing CalPERS' money into certain funds, including those already invested in by Grove Street.

Take, for example, Reliant Equity Investors, based in Chicago. Grove Street invested an undisclosed amount of money into Reliant in early 2002 on behalf of CalPERS. CalPERS staff then kicked in an additional $20 million as a so-called ``side investment,'' but the commitment is based on whether Reliant raises enough additional money from other investors.

Then, one of the firm's partners, Fidel Vargas, contributed $500 to the Angelides campaign Aug. 15. That summer, an adviser of Vargas' fund, former Secretary of Housing and Urban Development Henry Cisneros, organized an fundraising event for Angelides in Los Angeles, helping raise $25,000. Cisneros' firm, American City Vista, chipped in $3,000.

In November, Vargas and his team were invited to present their company before the CalPERS board. Vargas' partner, Thomas Darden, thanked Grove Street and CalPERS for their help in getting Reliant off the ground.

Cisneros also donated $2,000 to Westly's campaign.

Another example of VC fund ties to CalPERS board members is New Mountain Capital in New York, where founder Steve Klinsky donated $5,000 to Angelides' campaign. Klinsky said he donated money because ``Phil is a leader in the whole corporate governance arena,'' referring to Angelides' efforts to improve corporate oversight to avoid scandals like Enron and WorldCom.

CalPERS board member Michael Flaherman last month joined Mountain Capital as a partner.

Flaherman chaired CalPERS' investment committee, and had substantial clout within the organization.

Klinsky said he got to know Grove Street when that firm tried to recruit him several years ago, and that he met Flaherman only after Grove Street invested in Mountain Capital in 1999. Grove Street's investment has not been made public. But CalPERS also invested directly in Mountain Capital, bringing the total to $100 million.

There are at least 11 other investing relationships between Grove Street and fund managers who donated money to Angelides' campaign. The Mercury News has not learned of any donations made by Grove Street to Angelides. However, CalPERS has invested money into other ``middleman'' funds, including $100 million in Thomas Weisel Capital Partners, which invested $1,000 to Angelides' campaign.

A CalPERS spokesman said Grove Street is independent in its investment decisions, and that Angelides and Westly do not vote on side investments under $75 million, and Reliant was under that threshold.

Controller Westly, through a spokeswoman, said he supports disclosure in general, but that he hadn't had a chance to look closely at Grove Street's arguments for an exception to CalPERS' disclosure policy.

Angelides says he favors disclosure. He has maintained that, as long as donations are disclosed, he is justified in voting on investment decisions, even when those managers have made political campaign donations to him.

Under a settlement in December with the Mercury News, CalPERS decided not to release the names of Grove Street funds or performance results.

But CalPERS said it will solicit public input on the issue and announce some recommendations for a new disclosure policy at its March board meeting.

Kirk Hanson, director of Markkula Center for Applied Ethics at Santa Clara University, says that the influence of a single board member is held in check by 12 other CalPERS board members.