Money and conflict

On 16 July, 2013, 10 current and former Franklin Street Partners investment professionals wrote $350 checks to North Carolina State Treasurer Janet Cowell’s re-election campaign committee, Cowell for Treasurer. Though sums as small as $3500 rarely merit mentioning in the private debt world, the $3500 donated by Franklin Street professionals to Cowell’s campaign, which had roughly $84,000 cash-on-hand on 31 January, seemed unusual for several reasons.

Cowell holds final say in how North Carolina’s $87.4 billion of retirement system assets are invested. Since 2002, Chapel Hill, North Carolina-based Franklin Street has managed a hedge fund of funds on behalf of the state’s retirement system for relative value, event driven, long / short and tactical trading investments (Franklin Street defines its mixed manager strategies as capable of investing in fixed income, real assets, equities and alternatives, according to its website).

The hedge fund of funds had netted an annualised return of 4.61 percent as of 31 March, according to State Treasurer spokesman Schorr Johnson. North Carolina has paid Franklin Street roughly $22 million to manage that account since 2006. Records for fees paid prior to 2006 were unavailable. 

This is not the first time Franklin Street’s team has donated to Cowell. State Board of Elections documents filed by Cowell for Treasurer disclose donations from Franklin Street professionals in 2011 and 2012 as well, and firm founder and chairman Robert Eubanks has donated more than $1000 to Cowell’s campaigns since 2011.

Eubanks had not responded to a request for comment at press time.

It’s important to note that the firm’s professionals were well within their rights to make these donations. The US Securities and Exchange Commission allows investment managers to donate up to $350 per election to “officials for whom the covered associate was entitled to vote at the time of the contributions”.

Although Franklin Street’s relationship with North Carolina precedes Cowell’s election to State Treasurer in 2008, the fact that executives at Franklin Street are allowed to provide meaningful financial support to the political campaign of a major client’s chief decision maker is troublesome, and it’s unclear how this won’t create a significant conflict of interest for a Treasurer who only began her second term in 2013.

The market value of Franklin Street’s North Carolina fund has shrunk significantly over the last decade (from $464 million in 2008 to $265.8 million as of 31 March, according to Johnson and state documents).

Should Franklin Street request a re-up, or a renewal, in its relationship with North Carolina, the donations may put Cowell and her staff in the uncomfortable (and some might say, unethical) position of having to negotiate fund terms with managers who provided financial support to her campaign.

In 2013, North Carolina updated its investment policies to require its portfolio manager’s investment recommendations include report detailing conflicts of interest.

When asked about a possible conflict, Johnson said: “By policy and practice, political issues have no role in investment decision-making. Furthermore, Treasurer Cowell has been a consistent advocate for public financing of the Treasurer’s race since taking office in 2009.”

He added: “We have not had a contract amendment or renewal with Franklin Street since the Department adopted the requirement on June 5, 2013, so we do not have a conflict of interest certification form specifically for Franklin Street.”

There is good chance Franklin Street will never receive that renewal, or at the very least continue to manage such a large stake (92 percent) of North Carolina’s portfolio. In January, advisor Hewitt EnnisKnupp released a report indicating that the retirement system’s hedge fund portfolio had underperformed its benchmark by 2.2 percent.

Cowell went so far as to reduce the Retirement Systems’ investment in the fund in September 2010.  Even so, it’s unclear how Cowell and her staff will proceed with Franklin Street, which has a “hybrid open-ended structure and term”, according to Johnson. 

Last month, Cowell released a statement urging North Carolina House of Representatives to pass legislation that would expand investment oversight and transparency of the state’s pension fund. Here’s hoping that oversight extends to whatever influence can be purchased with political donations.