The Great Fundraising Racket
Happy Halloween! This year, I'd like to scare you all with a terrifying tale about money and mayhem…
Several years ago, a former government employee named Alfred Villalobos quietly left his job to start up a new company called Arvco Financial Ventures. This new business focused on helping large investment funds (such as private equity groups and hedge funds) to raise money from Villalobos’ former employer, the CalPERS pension fund for California State Employees.
A few years later, news broke that Villalobos and his new company had collected more than $58 million in fees.
People were shocked. How could a former government employee be making so much so quickly?
The truth is that it actually made a lot of sense. The CalPERS fund managed more than $200 billion, and Villalobos was strongly connected to the CalPERS board of trustees. When a private equity fund wanted to raise money, Villalobos could pull the right strings…
…for the right price, of course.
Today, the California State Government is actively reviewing this process. However, similar deals have been going on for years. These fundraisers, known as “placement agents,” have been skimming money off the top for decades.
But surely these “placement agents” are doing something right? After all, they must be reviewing the funds to select only the best ones for the shareholders.
Sadly, this is not the case. Placement agents want to see the deal go through…at any cost. They get paid upfront, so they have no incentive to see the fund get returns for the shareholders.
In short, Alfred Villalobos gets to keep his $58 million whether or not CalPERS makes any money.
The amazing thing is that this is only the tip of the iceberg. Take a look at this diagram, which shows how many fees and payments are collected before investors make any money:
Remember that most of these fees are collected regardless of performance. Pension fund managers get paid high annual salaries and bonuses. Private equity investors collect millions of dollars in management fees. Corporate executives get hefty stock option and cash compensation as well.
Now we have two choices. We can sit and complain about it, and hope that someone does something to fix the problem, or…
We can take control of the situation and focus on earning more money so we don’t have to worry about this ever affecting us.
The second choice is definitely the harder path. It takes a lot of work, and a little bit of luck as well. But stories like this are a good way of reminding us that the only way to guarantee financial security is to build it for ourselves.
Happy Halloween everyone!