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If this is true about Westly, public should be outraged

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Westly
Here is some tremendous reporting today by the LA Times about how State Controller and gubernatorial candidate Steve Westly apparently lobbied for public money to be invested in a fledgling venture capital fund whose politically connected partners helped Westly raise campaign cash.


This is new. It is also significant, because the public money being talked about -- the treasure of cash stored at the large California public employee pension plan, CalPERS -- has nurtured the Silicon Valley ecosystem for quite some time. If the money is abused, it threatens the public's faith in the system.

The story is well reported. People who are not familiar with the way the public pension fund, CalPERS, works may get lost by the myriad of details.

But to summarize, what is unseemly here is that Westly, who sits on the board of CalPERS, met with its staff officials to discuss the merits of investing in a particular fund that had been helping him raise cash for his campaign.

We will reserve judgement until we know more facts about the investment. Our gut reaction on the basis of this article, though, is that Westly has got too much else to do to be second guessing outside advisors to CalPERS, such as Grove Street Advisors who have the expertise to do true due diligence on whether to invest or not in this New York-based Healthpoint Partners LP. CalPERS invests in hundreds of firms, many of them through Grove Street, and Westly simply does not have the mental bandwidth to know which ones are a good investment, and which ones aren't.

Grove Street Advisors had rejected the fund as ill-suited for its portfolio. And now we find that after the CalPERS investment was made anyway (on a discretionary decision by the guy at the top of CalPERS' strategy for investing in VC funds, Rick Hayes, after meeting with Westly), that one of the Healthpoint partners became enmeshed in an unrelated pension-fund scandal in Illinois, and pleaded guilty to attempted extortion.

Now, decisions by Hayes' staff to overrule a recommendation by outside advisors do happen from time to time, as CalPERS' spokeswoman Pat Macht rightly points out. And Macht is correct when she says some of documentation for these decisions are generally not available for disclosure to the public. (In the past, we have been involved in lengthy lawsuits about these things, so we know).

But what we do expect is a full oral explanation, or a written statement, by Macht about why the staff chose to invest despite the outside rejection. Let's have some good reasons. Indeed, there may be some perfectly legitimate reasons for why Hayes' team decided to invest. Otherwise the Times or we at the Merc will start demanding, via California's open records laws, a copy of the correspondence anyway. CalPERS is a public institution. It takes money from public employees and invests it for them. And if it invests unwisely, we the public have to foot the bill. CalPERS is answerable to the public. It is fine for Macht to say the investment was all done "by the book." But Macht wasn't at all the meetings between Westly, Hayes and Healthpoint.

And why would Hayes, as a public employee, have an incentive to overrule an outside advisor? Well, he left the state's pension system in June 2004, taking a job as a managing partner with Oak Hill Capital, a national financial firm that does business with CalPERS. We don't know, this shows he certainly had an incentive to be friendly with the folks he was investing in. And what about the second outside consultant that was hired to review the Healthpoint investment proposal and found it sound? Why did they decided differently?

So we have put in a call to Macht to request an answer.

And Silicon Valley and other venture capital firms should care about this, too, because this sort of thing could cloud the public trust in a mechanism upon which many of them depend. They need CalPERS' funds. It forces we the public to demand more accountability, more transparency -- which VCs tend to dislike because they like making strategic decisions secretly as a way of beating the competition.


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Comments

In the race between Phil Angelides and Steve Westly, the slimeball is Angelides. Steve has always been above reproach in his role as a public servant. I do not doubt that this was a legitimate CALPERS investment. Unfortunately since Angelides is behind, he is desperate and reaching for anything he can grab hold of to make Steve look bad and I'm sure will exploit the LA Times article to the nth degree.

Jeremy on April 6, 2006 5:38 PM
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Come on, guys, aren't you being a bit reactionary here? Westly has too much to do to be figuring out whether a fund is a fit for CalPERS? As you know, a huge part of what makes good VC investors are the individual partners invovled. If Westly happened to have some very good insight into the caliber of people at Healthpoint (which it sounds like he plainly did given the extent of his exposure to them), it's certainly quite reasonable that he might disagree with Grove Street's recommendations. Grove Street is going to do work on the investments, and check up on the people, but Grove isn't going to spend truly significant amounts of time with the principals in the way Westly has. I'd frankly call it being a good board member to call attention to a fund that maybe slipped under Grove Street's radar. Just like good VCs investing in companies that are referred to them by known sources, is it so crazy to think that CalPERS wouldn't act in a similar fashion?

As to your point about CalPERS investing for the public and being answerable--sure, of course. But CalPERS has done an incredibly good job of managing this money, better than almost any other large pension. Why not give them the benefit of the doubt on this one instead of assuming that the rationale is dirty? You are certainly giving that benefit to Grove Street. (And incidentally both GS and CalPERS could be right on this call, for different reasons and for seeing different parts of the portfolio.)

It's easy to see conspiracy and wrong when that's all you're looking for. Given the track record of CalPERS and its managers, doesn't it seem a bit much to assume or imply that Westly somehow pressured them into funding a bad firm? What on earth do you think Westly could have conceivably said to cause this kind of coercion? Far more likely I think is that Westly acted like a good board member and made sure that people he thought highly of were given a closer look. This is the same kind of thing good VCs do for their portfolio companies.

At any rate, if all the political fundraisers hosted or attended by valley VCs came under this kind of scrutiny, there's hardly a public LP out there that wouldn't have conflicts. The level of outrage you are at here is way overblown.

Benjamin on April 6, 2006 6:19 PM
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Benjamin, I agree with you on point about not wanting to jump the gun on judgement. And as we said, there are possibly legitimate reasons for why the investment was made. That's why we said up front that we don't have all the facts, and want to reserve judgement until we find out more -- and that is why we've contacted Pat Macht for an explanation. Perhaps she gave one to the LA Times, and it wasn't adequately reported? I don't know. For various reasons, Pat & I never talked live today, but I hope to do so soon. All that said, I think we have legitimate grounds here to ask why Westly thought this one particular fund -- among several hundred that exist out there -- was so impressive that CalPERS should invest in it even though CalPERS pays its own staff and its own outside advisors to make these decisions, and even after the main initial advisor responsible at the outset, Grove Street, turned it down twice.

Matt Marshall on April 6, 2006 6:35 PM
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...and gimme a break about Westly having more time to check out these funds that Grove Street does. That's Grove Street's job! Westly's got much more important things to do that kick the tires of individual funds when CalPERS is paying big bucks -- in the millions-- for Grove Street and other advisors to do the checking.

Matt Marshall on April 6, 2006 6:47 PM
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Hmmm... A recent SiliconBeat post said that Silicon Valley needs to get better at lobbying.

A little suggestion. To do better job in public advocacy arena we should refrain from tearing down our own candidates for no good reason. There is no evidence of wrongdoing whatsoever, only hearsay and hypotheticals.

Angelides is desperate to find anything to sling at Westly, doing a very poor job of it and has to settle for these little tidbits. After years as real estate developer and party boss he better look in the mirror.

Westly deserves our support, as the candidate best suited to stimulate the Innovation Economy.

Political Animal on April 10, 2006 9:25 PM
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Here is the story about Angelides we should be focusing on. Offloading his interest in a bank that was handing out money to his real estate friends and then went poof:

"In a 1993 interview with the San Jose Business Journal, two bank officials attributed losses of more than $1.6 million in 1991 and '92 to what the article described as "unwieldy lending practices, much of which was tied to real estate."

http://www.sacbee.com/content/politics/story/14241054p-15060652c.html

Political Animal on April 10, 2006 11:01 PM
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