City Comptroller Alan Hevesi approved the investment of $130 million in city pension funds in a private equity fund controlled by one of his top financial supporters in 1998, even though the company was only three years old and had little in the way of a track record.
The fund, FdG Associates, is run by M. Anthony Fisher, a member of the Fisher family, one of the most powerful real-estate families in the city. The Fisher family have been generous supporters of Mr. Hevesi’s Mayoral campaign, raising more than $100,000 since the late 1990’s.
Mr. Fisher stands to profit handsomely on fees for managing the money. A similar investment of pension funds in a proposed $1 billion real-estate fund to be run by the Fishers was scuttled in January 2000, after a bitter confrontation between Mr. Hevesi and Mayor Rudolph Giuliani. City Hall aides charged at the time that there was a connection between the deal and the Fisher family’s financial support for Mr. Hevesi.
According to people familiar with the 1998 transactions, Mr. Fisher was awarded control of the pension funds over at least a dozen other firms, some of which had far more experience managing this type of investment. The funds belonged to police, firefighters and teachers unions and the New York City Employees Retirement System, which represents other unionized city workers.
The investment was made despite concerns raised by City Hall’s representatives on the pension boards about FdG’s lack of experience in equity investments, according to a City Hall official. What’s more, said one official, Mr. Hevesi failed to tell the pension trustees that the Fishers were among his top financial supporters.
“Not only did we have concerns, but it was never disclosed to the boards that there was a relationship between the Fisher brothers and the Comptroller as [Mr. Hevesi’s aides] were recommending the investment,” said the official. “That’s something that they should have done.”
David Neustadt, a spokesman for Mr. Hevesi, acknowledged that Mr. Hevesi was close to Zachary Fisher, Anthony Fisher’s uncle and the founder of the family firm, but said that played no role in the decision. The elder Fisher, who died in 1999, was a prolific giver to many politicians, including Mayor Giuliani.
“The Comptroller had a close relationship with Zachary Fisher, not Anthony Fisher, and it was no closer than the Mayor’s own close, intimate and public relationship with Zachary Fisher,” said Mr. Neustadt.
The deal was Mr. Hevesi’s first foray into “alternative investments” of the pension funds-investments that would be more risky, but potentially more lucrative, than the traditional bonds or mutual funds. As the city’s chief financial officer, Mr. Hevesi oversees the investment of all city pension funds, among other duties.
Mr. Neustadt said the decision to invest the money with Mr. Fisher was made by the board of trustees of each of the four pension funds. The boards are made up of union leaders and elected officials, including the Mayor, Public Advocate Mark Green and Bronx Borough President Fernando Ferrer. “The people running FdG have extensive experience in investing, including private real-estate and equity investments,” he said. “Apparently the trustees felt this more than made up for FdG’s not having managed an institutional fund.” Mr. Hevesi recommended several other funds besides FdG around the same time, he said, all of them vetted by an independent consultant. He said the unions, not Mr. Hevesi, were the chief cheerleaders for Mr. Fisher’s proposal. Mr. Giuliani’s aide scoffed at the notion that Mr. Hevesi, custodian of city pension funds, was a mere bystander.
Mr. Hevesi’s office houses the city’s chief investment officer and manages the funds from day to day, and pension-fund trustees said they relied on the Comptroller’s institutional knowledge and judgment when making investment decisions.
The fund, Mr. Neustadt claimed, has done “fantastically.”
“The pension funds have received better than 80 percent of what they’ve invested so far back,” he said. The Comptroller’s office expected to do even better in the future, he added. But he declined to go into details about the fund’s performance.
Because Mr. Fisher’s firm operates in the largely unregulated private equity market, the state of the fund’s finances is difficult to determine. It does not publicly disclose all its investments, which are mainly in private companies.
According to an Observer review of the fund’s publicly disclosed investments, FdG has thus far fallen short on assurances it made to union trustees that the company would invest a substantial share of the pension funds in New York City companies. Only two of the six companies in which FdG is known to have invested were based in the city, and one of those has since moved to New Jersey.
Nick Mancuso, secretary-treasurer of Local 237 of the International Brotherhood of Teamsters, former president of the Uniformed Firefighters Association and a trustee of NYCER at the time, said the trustees are now soliciting proposals for a new private equity fund, one that will put its money exclusively in the city.
“We’re not here to give money away,” he said, “we’re here to make an investment.”
Private equity funds, which typically pump large sums of money into small companies in return for an ownership stake, have become popular-even recommended-investment vehicles for public pension funds, provided, according to a Federal Reserve Board study, that the fund managers have “a favorable track record.”
But FdG Associates was just getting started. Mr. Fisher, the firm’s general partner, had a background in his family’s real-estate firm, not finance. The prospectus for the FdG Capital fund, a copy of which was obtained by The Observer , listed only two previous investments of the sort it would be making for the city. The prospectus also outlined the kinds of investments the firm would pursue: companies worth between $50 million and $250 million, with “strong management teams and established track records” and “low technological risk.”
Yet the fund’s first investment was in a New Economy start-up called Vitaminshoppe.com. The fund invested at least $5.25 million in venture capital, saw the company through a $50 million initial public offering and then-after the company’s stock price fell to 25 cents a share from a high of $17-announced it would buy up the outstanding shares and take the company private again. The $8.4 million buyout, approved April 12, will be largely financed by the FdG fund.
“Everyone Lost Money”
Mr. Fisher said his own family has invested $25 million in the fund. “Everyone lost money,” he said. Still, he continued, “we’ve made nothing but money in our business careers, and I am very confident we’ll make a lot of money for the pension funds.”
Mr. Fisher said his family’s campaign contributions played no role in the pension-fund investments in his company. “I truly and honestly believe that the Comptroller is a terrific candidate and that he’s done a terrific job for New York,” Mr. Fisher said. But he said he hadn’t spoken to Mr. Hevesi in “over a year.”
Mr. Hevesi’s relationship with members of the Fisher family stretches back to his first successful bid for citywide office. In 1993, when Mr. Hevesi challenged incumbent Comptroller Elizabeth Holtzman, Anthony Fisher’s late uncle, Zachary Fisher, was an early Hevesi booster, acting as an emissary to New York’s business community.
In 1997, the year before the city’s investment in the FdG Capital fund, the Fisher family and its associates donated about $40,000 to the Comptroller’s reelection campaign, records show. When Mr. Hevesi began raising money for his Mayoral campaign the following year, the family’s generosity continued. Records show that the family and its associates have contributed more than $112,000 to the Hevesi campaign.
Donations from FdG Associates executives, FdG Associates investor Charles de Gunzburg and Jeffrey Horowitz, founder and chief executive of Vitamin Shoppe Industries, came within days of the fund’s June 1999 investment in Vitaminshoppe.com.
The Fishers also have given smaller amounts to the Mayoral campaigns of Mr. Green and City Council Speaker Peter Vallone. The fourth Democratic candidate, Mr. Ferrer, has declined to accept donations from the family.
Anthony Fisher first approached city officials about investing some of its pension money with FdG Associates in 1998. Then 47 years old, Mr. Fisher was a senior partner at the Fisher Brothers real-estate firm, which his brother, Richard L. Fisher, principally manages. Part of his job there, he said, was to coordinate the family’s investments outside of real estate, such as its purchase of numerous bankrupt hotels from the Resolution Trust Corporation in the wake of the savings-and-loan crisis. “People always think of us as a real-estate company,” Mr. Fisher said, “but approximately 50 percent of the family’s wealth is outside of real estate.”
He formed FdG Associates in 1995, using seed money from his own family and from Mr. de Gunzburg, a member of the Bronfman family, to get into the private equity market.
Any new investment of the city pension money has to be approved by the boards of trustees of each city pension fund. Working in Mr. Fisher’s favor was the family’s good relations with the city’s unions. “[The Fishers] have been involved in city projects for many, many years, and a lot of charitable organizations tied in the city,” said Mr. Mancuso, the Teamsters official. “That’s how I knew the Fishers.” The police and firefighters remembered how the Fishers set up scholarships for the children of men and women killed in the line of duty. Mr. Fisher, said another source, made a special effort to wine and dine the trustees as they considered investing in FdG Associates.
Mr. Fisher timed his pitch perfectly. Mr. Hevesi’s office had just completed a three-year study of new strategies for the investment of union pension money. In those days of skyrocketing I.P.O.’s and rock-star money managers, many pension fund trustees were enthusiastic.
Private equity, the type of investment Mr. Fisher was proposing, is a vast and largely unregulated pool of money. Since federal regulations on pension investments were loosened in the 1980’s, state funds in New York, California and Washington, among others, have become major investors in the estimated $100 billion market. But private equity funds remain a fairly risky investment.
Here’s how they work: The investor, in this case a pension fund, gives a large sum of money to a professional investment firm, just as an individual would buy into a mutual fund. But unlike a mutual fund, once the money is committed, the investors can’t pull out until the fund is dissolved.
The manager who runs the private equity fund identifies promising private companies that need money, but that can’t or don’t want to go public, issue bonds or borrow from banks. In return for the cash infusion, the portfolio companies give up a share of their ownership and autonomy to the private equity fund.
Like a roulette bettor, the private equity-fund manager places wagers on many companies, hoping one or two will come up big. At the end of the fund’s life, the companies remaining in the portfolio are sold off, and the proceeds distributed to the partners, minus a percentage for the fund manager.
The key to minimizing risks, experts agree, is picking an experienced manager. “Track record is essential,” said one veteran private equity manager who raises money from public pension funds. Before investing, he said, pension funds typically check to make sure a firm’s past record shows that it invested well and within the parameters it advertised in its original prospectus.
To Mr. Hevesi’s office and the pension-fund trustees, private equity was seen as a way to earn good returns, while diversifying the city’s somewhat stodgy portfolio, said Jon Lukomnik, who was the deputy comptroller in charge of pension investments at the time. In 1998, Mr. Hevesi’s office resolved to invest roughly 2 percent, or approximately $2 billion, of city pension money in such “alternative investments.” Almost immediately, Mr. Lukomnik said, he was deluged with proposals. At the time Mr. Fisher approached the pension boards, the trustees had already rejected several other potential firms that had been vetted and recommended by an independent consultant, the Pacific Corporate Group, Mr. Neustadt said.
On paper, FdG Associates appeared to be an unlikely suitor. Private equity experts say that public pension funds are typically afraid of taking risks on newcomers. But FdG Capital’s prospectus listed only two previous private equity investments: a $40 million investment in a North Carolina animal-feed company, and another $40 million stake taken in Vitamin Shoppe Industries, a New Jersey–based chain and mail-order company specializing in vitamins and nutritional supplements. (Mr. Fisher said the Pacific Corporate Group conducted extensive research on his previous investments at Fisher Brothers, going back a decade or more.)
A typical private equity firm employs somewhere between six and 12 experienced managers, according to the 1995 Fed study. A confidential analysis conducted for the union trustees by the Pacific Corporate Group stated that business at FdG Associates would be conducted “primarily, nearly exclusively,” through Mr. Fisher and his second-in-command, David Gellman, who at the time was the only person in the company with extensive experience in private equity investing.
“If you’re a trustee in the fund, no matter how intelligent these people are, it would definitely be a leap of faith to assume that they would be successful in doing something different,” said a private equity veteran who asked to remain anonymous.
Typically, to minimize risk, public pension funds take small stakes in several very large funds. Mr. Hevesi took a large stake-more than 50 percent-in a very small fund. Eventually, four city pension funds-representing teachers, police, firefighters and other public employees’ unions-voted to invest.
Mr. Gellman, the FdG Associates executive, said he believed the unions were “intrigued” by the “large family commitment” to the fund. The Fisher and de Gunzburg families were each putting $25 million of their own money into the fund-“and the fact that they would have a more customized, personalized response from us than from somebody with a $3 billion fund.”
Severalpensionfund trustees said they relied heavily, in deciding to invest, on Pacific Corporate Group’s vetting process. (Mr. Hevesi had insisted on an independent consultant, one source said.) But several people involved in the decision said there were disagreements over FdG Associates’ level of qualification. Mr. Giuliani’s appointees to the board, in particular, were skeptical. A City Hall aide said the Mayor’s representatives on three of the four pension boards voted against the FdG investment.
But eventually, all four boards voted to invest. The key, trustees said, was Mr. Fisher’s willingness to do what many other private equity funds wouldn’t-target his investments toward companies based in the city. Mr. Mancuso, the Teamsters official, said Mr. Fisher told trustees of his plans to aggressively expand the Vitamin Shoppe chain into the city. “This whole category of investments really came about to try to stimulate the job growth in the city,” Mr. Mancuso said.
On July 9, 1998, the city signed an agreement forming FdG Capital Partners. Under the agreement, the police pension fund invested $50 million, while the firefighters’ and public employees’ unions invested $25 million each. Mr. de Gunzburg and the Fishers themselves invested $50 million, while a subsidiary of Chase Manhattan Bank contributed $10 million. Later on, the teachers’ union joined in with $30 million, and other subsequent investments have brought the pool of money in the fund to $205 million.
Under the agreement, Mr. Fisher’s firm will collect yearly management fees of about 1.75 percent of the total amount of money in the fund, or about $3.6 million. If the fund turns a minimal profit, he stands to collect 20 percent of the returns.
According to the prospectus, the fund was to finance management buyouts and other “growth-equity” investments, focusing on privately held Old Economy businesses. FdG’s Web site goes further, claiming that “the firm does not invest in start-ups or in companies involved directly in real estate, banking, gaming, high technology or biotechnology.”
According to the minutes of confidential meetings reviewed by The Observer , an FdG representative suggested to one group of trustees that they wouldn’t invest pension funds in risky, high-tech businesses. “We don’t get into any black-box types of business that are doing very high technology or biotechnology,” the representative told the NYCER’s board of trustees, according to the minutes. “That’s for the venture capital world.”
Yet the fund’s first move, in June 1999, was a stake in Vitaminshoppe.com, an online spin-off of the store chain it already owned. Four months later, the company went public at $11 a share, raising about $50 million. The stock reached a high of $17 in November 1999.
But the company soon lagged behind its competitors. By August 2000, its stock price had collapsed. In retrospect, “none of the money going into business-to-consumer Internet retailers was smart money,” said Scott van Winkle, an analyst who covered the company.
The Long Run
Mr. Lukomnik, the former deputy comptroller, warned against judging a private equity fund too early in its life. “Your winners [may] not become apparent until later on, [but] your losers become apparent very quickly,” he said.
Indeed, none of the fund’s other investments were nearly as disastrous, but almost all of them were in out-of-state companies, some in Internet firms. And the fund did score at least one coup: In November 1999, FdG invested $34.5 million into a leveraged buyout of a Georgia horticultural supply company called McGinnis Farms and announced its plans to finance a nationwide expansion. But in February, Deere and Co. bought the company for $180 million, earning FdG what managing partner Mark Hauser described as “a nice return.”
FdG has also invested $10 million in Golf Galaxy, a chain of 21 golf superstores, in a North Carolina maker of shoe insoles, and in a New York based start-up that tracks Internet advertising.
In December, FdG invested $2 million in rfpMarket.com, a Cambridge, Mass., Internet company that aspires to “link the buyers and sellers of all things.” There was a time when such “business-to-business” Internet companies were considered a promising investment. No longer, said Matt Sanders, an analyst at Forrester Research: “These marketplaces are starting to fall by the wayside.”