Psst. Wanna Buy a Mid-Market Boutique?

November 5, 2009

By Ken Tarbous

CIT Group looked to remodel itself with the purchase of a middle-market investment banking boutique two years ago, but now that the finance company has filed for bankruptcy the fate of the business unit is uncertain, leading some insiders to speculate that the boutique's original founders may try to buy it back.

That boutique, Charlotte, N.C.'s Edgeview Partners, has lost some key deal makers because of uncertainty at CIT and some insiders believe that the bankruptcy and a steady trickle of news about the firm's financial travails have made it tougher for the M&A firm to snare advisory assignments.

Edgeview managers began shopping their firm looking for potential buyers, and as recently as last month insiders were trying to "liberate" Edgeview from CIT, according to a banker who has done business with CIT and Edgeview but did not want to be named.

CIT resisted the idea of selling Edgeview, to the partners or anyone else, and in February Edgeview founding members Matt Salisbury and Drew Quartapella left the firm.

"I'm certain that they'd like to see this taken out of CIT, not as part of a sale [to a third party], but as an independent entity," a market participant with knowledge of the situation said.

Spokesmen for CIT and Edgeview declined comment. And CIT made clear in a presentation to creditors that Edgeview has a role in the lender's future, and it's not entertaining offers for the boutique, say market participants.

But others suggest the attraction of a sale is too strong for Edgeview's bankers and creditors of CIT, which aims to get through its bankruptcy in 30 to 40 days.

When Edgeview's founders sold their mid-market bank to CIT in July 2007 few details about the transaction were published, but a former employee estimates the cost at $55 million.

CIT is the latest casualty of the credit crisis now in its third year. The company has not had full access to credit markets and it has buckled under a heavy debt load. The banking boutique, say market observers, faces what typically happens during a restructuring to operations not related to a core business: they are jettisoned, either sold or shut down.

But market participants familiar with the situation say that discontent within the banking boutique's dealmaking team grew quickly in the first six months of Edgeview's marriage to CIT.

A deal to extricate Edgeview from CIT may have been delayed by complications tied to CIT's financial difficulties. Its bankruptcy filing on Sunday, though, could clear a hurdle to a sale. With few Edgeview assets to sell, and in the context of the bankruptcy workout amid the current economic climate, it would be unlikely that CIT's bondholders and new managers would want to keep the banking boutique. It makes sense that Edgeview's own professionals would be the preferred buyers, and remaining payments related to the structure of CIT's Edgeview acquisition favor a buyback arrangement, one observer said.

Edgeview's situation has been likened to what Richmond, Va.-based Harris Williams went through after Sirrom Capital picked up the advisory firm in 1995 for approximately $24.5 million. When Finova Group bought Sirrom, Harris Williams bought back control in 2000, just a year before Finova went bankrupt. PNC Financial acquired Harris Williams in 2005.

But in CIT's case, questions still linger about whether it was the right play for the lender to get into the midmarket M&A advisory arena in the first place. Under Jeffrey Peek, CIT aspired to be something more than just a century-old lender to mid-level businesses, starting up its own internal M&A group in March 2005.

In addition to branching out into M&A advisory work, CIT's new management got into the student loan and home-equity loan finance businesses.

When CIT encountered difficulty in building a market presence in the world of M&A advisory work, the lender acquired Edgeview and looked to use its own lending business as a source of assignments in cross-selling efforts, a banker with knowledge of the situation said.

"The best way to make inroads was to buy an existing platform, but it was a major departure from their hallmark and franchise business," a former CIT employee who declined to be named said.

Edgeview has closed more than 300 midmarket transactions in its eight-year history, according to the company. In 2006, Edgeview advised on deals with total enterprise value of $2.5 billion, according to published reports.

There are examples, though, of early success for the middle-market banking team after it was snapped up by CIT.

Edgeview helped family-owned food processor and distributor Michael's Finer Meats and Seafoods of Columbus, Ohio, track down private-equity investors who would be willing to help fund its business expansion. Edgeview linked Michael's with Sorenson Capital in a deal that closed in early 2008. CIT arranged the financing for the transaction.

But for the past year or so, Edgeview's connection to CIT may have hampered it. M&A deal flow this year is generally off from last year and credit conditions still have not thawed enough to allow for much in the way of leveraged buyouts. But CIT's woes have been well documented and this likely impeded the investment banking team's ability to attract new M&A assignments from companies with enterprise values up to $300 million, says a banker who has done business with CIT and Edgeview said.

Amid all the tumult, though, a source within Edgeview said that the banking boutique's dealmakers did close a divestiture of a building products company last week — just days before the CIT bankruptcy filing. And there are other deals in the pipeline, the source said.

"We're not completely at stand-down here, but at the same time we're also cognizant that our deals and deal flow is being hampered by the connection to CIT," the Edgeview professional said.

In addition to problems related to the CIT bankruptcy, the exodus of talent does not bode well for Edgeview's business either, observers say.

Former Edgeview managing director William A. Morrissett, who had run the defense, aerospace, and homeland security practice and assumed much of Quartapella's and Salisbury's responsbilities after their departures, left Edgeview in the summer. Gregg Smith, who had been CIT's man responsible for the advisory firm, has moved to Conway MacKenzie, where he is a senior managing director in the turnaround specialist's New York office.

The high-level departures and defections of cornerstone talent from Edgeview is a telltale sign that the shop faces problems staying focused on attracting and serving clients, a banker who has done deals with Edgeview said.

"That really tells you about their ability to get paid," he said.

But Bill Hobbs, a managing partner at private-equity firm Carousel Capital, which has hired Edgeview as an adviser for past assignments, said that even with the departures, Edgeview has maintained the quality of its work.

While Hobbs said he did not have knowledge of any plans by Edgeview employees to buy back their firm, he thought such a sale would benefit the advisory firm.

"Would I like to see them independent again? Absolutely," Hobbs said.

Cain Brothers Appoints New CEO; Focus Remains Health Care

INVESTMENT DEALER'S DIGEST
November 2, 2009

Co-founder, James Cain, remains on executive committee

By Ken Tarbous


Health-care specialty investment bank and capital advisor Cain Brothers said Robert Fraiman Jr. will take the reins as chief executive and president on Jan. 1.

Fraiman, 51, will take over the duties from CEO James Cain, who co-founded the firm 27 years ago. Cain will continue to serve on the firm’s executive committee.

The firm plans to stay focused on health care through specialists who focus on tax-exempt capital markets, corporate finance, and real estate. At the same time, it will grow its asset-management business, which already has attracted clients from the hospital and insurance sectors and other areas related to healthcare, says Fraiman who has 24 years banking experience.

Fraiman joined Cain Brothers as head of its corporate finance group in 2004. He will continue on in that role in addition to his new responsibilities. Before joining Cain Brothers, Fraiman was in charge of healthcare investment banking at BMO Capital Markets.

Fraiman, who has an MBA from Columbia Business School, also spent 16 years at Bear Stearns, where he co-founded the healthcare investment banking group. Fraiman’s father, Robert Fraiman Sr., ran a specialist firm on the floor of the New York Stock Exchange, where he was a trader for more than 30 years before retiring in the mid-1980s.

Firm owners take it in the wallet

INVESTMENT NEWS
September 13, 2009

By KEN TARBOUS


While few independent advisory firms were able to completely avoid salary cuts, the owners of many firms reduced the extent of those cuts by slashing their own paychecks in 2008.

The 2009 Moss Adams/InvestmentNews Adviser Compensation and Staffing Study found that the heads of nearly 70% of the 757 independent advisory firms surveyed cut their own salaries last year — in many instances to a greater degree than they asked their employees to absorb.

“The owners have tried to take most of the pain themselves, particularly the firms that are better-positioned in the long run,” said Matt McGinness, a principal at Best Practices Research, the research and consulting firm that analyzed the survey results. “They have done that [rather than] cutting staff.”

Enlarge This PhotoIn many cases, the owners' pay cuts helped forestall, or even avoid altogether, widespread salary reductions, Mr. McGinness said.

For employees, seeing a firm owner take a bigger pay cut than they had to is something of a morale booster, said Sean Cunniff, research director in the brokerage and wealth management practices at The Tower Group Inc.

“It is tough medicine in the short run, but it can pay for itself many times over in the long term,” he said.

Indeed, “these times will define the character of firms,” said Philip Palaveev, president of Fusion Advisor Network, which provides independent advisory firms with business management consulting, marketing support, advice on best practices and other tools. “There's a lot of research that culture is created [during time of] crisis.”

George Tamer, director of strategic relationships at TD Ameritrade Institutional, whose team has worked with more than 1,800 advisors this year, said that beyond cutting their own compensation, owners of advisory firms are trying to find ways to reduce expenses, such as renegotiating equipment leases and attacking operational inefficiencies, before cutting employee compensation.

Automatic enrollment quadruples over three-year period among retirement plans run by Vanguard

August 26, 2009


By KEN TARBOUS

About 20% of the defined contribution plans administered by The Vanguard Group Inc. had adopted automatic enrollment by the end of last year, up from just 5% three years earlier, according to a recent study by Vanguard.

“How America Saves 2009” also found that employees covered by automatic enrollment plans at the Malvern, Pa-based mutual fund company had an overall participation rate of 84%, compared with 60% for plans with voluntary enrollment.

At the end of 2008, about half of Vanguard’s 2,200 defined contribution plans had designated a qualified default investment alternative and, of those, 85% chose a target date mutual fund.

“This means that more people are being defaulted into [target date funds],” Vanguard spokeswoman Linda S. Wolohan said yesterday.

The survey also found that decreases in participant account balances were not as drastic as might have been expected.

Participants who had balances both at the start and end of the 2008 experienced a median decline of 14%.

The median decline for pre-retirees — those ages 55 to 64 — was 16%.

On average, participants contributed 7% of their salaries to their retirement accounts in 2008, compared with 7.3% in 2007, the survey found.

The drop is due to the 3% deferral rate set by many automatic enrollment plan sponsors, said Vanguard.

The survey, which was released Aug. 19, looked at the behavior of more than 3 million participants.

Dilapidated shopping plaza eyed for redevelopment

Sept. 7, 2004

By Ken Tarbous

EAST BRUNSWICK: For years drivers have been passing the blighted Meyer's Shopping Center on Route 18 south, wondering what happened to the once-vibrant strip mall that held popular sidewalk sales and auto shows.

The last two tenants of the run-down plaza are preparing to leave and the future of the property, owned by the Branciforte family, is still in question.

Large gas tanks have been removed from the ground near the shuttered Mr. Good Lube on the site of the dilapidated strip mall.

The Oreck Floor Care Center has plans to move on or about Sept. 15 to the former site of The Bridal Center across the highway.

The Middlesex County Republican Organization has its headquarters in the plaza next to Oreck.

"We know that ultimately we'll be moving out, we're not certain when that's going to occur," Joe Leo, the Middlesex GOP's chairman, said. "We are expected to be vacating fairly soon. We're hoping that we will not have to move until the election."

Even the last Atlantic City bus has left, now picking up its daily passengers at the nearby American Harvest Gourmet Market.

A 10-year-old appraisal puts the property's assessed value at $2.913 million, according to township records. A portion of the 18.4-acre tract, approximately 3 acres, is protected wetlands and has water easements and encroachments and cannot be developed because of land-use restrictions.

The 2003 township tax bill, sent to "C. Branciforte et al" at a post office box in Milltown, was $184,152.

Robert Rafano, an attorney representing an unidentified member of the Branciforte family -- the four siblings, Gene, John, Carmella and Carl -- confirmed the property is for sale.

"Extensive negotiations are going on with a prospective purchaser, which we hope will be concluded shortly," Rafano, a New Brunswick-based lawyer, said last week. "We're at a very critical stage."

Luigi Branciforte, a local banker and businessman who owned the property, died in August 1997 at 79, leaving the site to his children.

The family has not responded to requests to tell their story of dealing with the business interests since their father's death.

Rusted tanks from a gas station once located on the site and mounds of dirt covered by tarp, evidence of the excavation, can be seen from the highway.

The pothole-filled front parking lot of the shopping center, also known as the Grand Plaza Shopping Center, is littered with papers, empty cigarette packs and other trash.

The rear lot is strewn with plastic garbage bags, empty soda bottles and other debris and has become a hidden parking spot for at least one tractor-trailer.

Faded signs -- some with exposed fluorescent lights -- for GMI Designs Custom Furniture, the East Brunswick Pub and others are remnants of better days at the one-time shopping mecca, which opened in 1955.

Meyer's Discount Store was the centerpiece, selling dolls, toys and bicycles to generations in the local community. The toy store, founded in New Brunswick in 1914, held its 60th anniversary celebration in 1974, an event featuring an antique-car show and a three-day outdoor sale by the 15 stores at the plaza.

Today, the tall highway sign, visible up and down Route 18, is barren except for the Oreck Floor Care Center enticement to sales and service for the vacuum-cleaner and air-purifier dealer.

Cushman & Wakefield of New Jersey Inc. is the exclusive agent marketing the property for sale, the real-estate company confirmed. David Bernhout of C&W referred questions to the owners' representative for the sale, James F. Hyland, a judge and attorney based in East Brunswick.

Hyland, said to be a family friend of the owners, did not return numerous calls over the past year seeking comment.

Calls to New Brunswick-based attorney Carl Branciforte, one of the properties' owners, seeking comment were not returned.


The 57,600-square-foot one-story strip mall, fronted by the Mr. Good Lube building, has about 350 parking spaces, according to promotional materials from C&W's East Rutherford office. Rent on the Oreck space is $2,000 per month and the Mr. Good Lube location rent was in excess of $3,600 per month, according to C&W materials.

"That's probably the last great site available in East Brunswick," Adrian Kroll, president of Kroll Commercial Realty, said Wednesday. "The most desirable highway to be on in the Central Jersey area is Route 18."

The property could easily fetch $1 million per acre, even up to $1.4 million per acre, and would make sense for a retailer that needs to be on Route 18, he said.

"If somebody wants to be here, there's not a lot of choices." The tract, with 15.4 acres available for redevelopment, could sell for more than $20 million at that rate.

Kroll, whose East Brunswick firm has brokered more than $20 million in sales so far this year, said his office constantly gets calls about the Meyer's Shopping Center.

" 'I can't believe somebody has kept that site vacant that long.' This is what I hear daily," he said.

Wal-Mart and Wegmans Food Markets are conspicuously absent from East Brunswick, he added.

"I see a national company coming in, one of the big boxes. I think that building has to be razed, and a brand-new, multimillion-dollar structure has to come in," said Kroll, who has run his commercial brokerage specializing in retail, office and warehouse space for 13 years. "We have a tremendous amount of capable buyers out there who are ready, willing and able to act."

The access along Summerhill Road, the jughandle onto Arthur Road, and the huge Route 18 frontage makes it a wonderful site for a retailer, he said.

On Thursday, East Brunswick Mayor William Neary, a Democrat, pledged to immediately investigate any property-maintenance issues at the site.

The mayor said using eminent domain to take the property is unlikely.

"I've been very reluctant to do that," he said. "Our retail corridor is so strong it doesn't need the heavy hand of government."

The mayor said there are many opportunities for land owners in town, pointing to Lowe's, which has received Planning Board approval for a home improvement store at the East Brunswick Plaza, near Kohl's and Circuit City.

Neary said he feels confident a full proposal for the Meyer's site eventually will come before the Planning Board.

"The township itself understands that the property is valuable, and we figure the private owners will be able to make a deal, they haven't done it yet," he said. "Meyer's isn't being forgotten." Ed Cohen, head of economic development for the township, has been keeping a watchful eye on the valuable piece of land.

"The property has been up for sale for 7 years," he said Wednesday.

He has heard dozens of times that the tract had been sold, he said, adding that just because tanks have been removed doesn't mean a sale is imminent.

"It's 7 years since this administration has been here," he added. "The month that we took office 7 years ago is when Meyer's (toy store) closed, and that thing's been going downhill."

The Summerhill Marketplace, home of the A&P Food Market, is another Branciforte family property suffering from vacancies -- two stores in the 83,856-square-foot center are empty.

The Daisy Fair, a spring benefit for a township-run program for children and adults with disabilities, had to be postponed until July because of negotiations between the Branciforte family and a Pennsylvania-based firm, organizer Ronnie Wisniewski said in July. Wisniewski said then that the parties should be near a closing date.

Retailers snap up prized space

HOME NEWS TRIBUNE
September 7, 2004

By Ken Tarbous

EAST BRUNSWICK: A Lowe's home-improvement store is coming to town, more proof that the Route 18 retail corridor is one of the most sought-after locations in the state, real-estate experts say.

"It's the law of supply and demand," said Adrian Kroll, president of Kroll Commercial Realty. "There are little sites on 18 that are going for twice what they did four or five years ago."

The limited amount of available rental retail space and land for sale contributed to the rise, Kroll said, and spots on Route 18 are very desirable.

"People from Marlboro, Manalapan, Old Bridge, and even Colts Neck take 18 to get to the Turnpike in the morning." Kroll represents the owners of the old Quality Auto store property. A 5,000-square-foot center is planned there, and two of the three stores have been leased, he said Wednesday.

"We're getting very high rents here, higher than I had anticipated." The names of those two tenants were not available.

Arte Kitchens, a high-end store, also has signed a lease for an 8,000-square-foot space at 280 Route 18, near Gabowitz TV & Appliance Co., Kroll said.

Kroll, whose East Brunswick firm brokers commercial sales and leases, helped bring to town a new 100-room Holiday Inn Express on Naricon Place behind the Brunswick Hilton at Tower Center and a 66-room Comfort Suites on Old Bridge Turnpike, both expected to open in the fall.
Business is indeed booming along the five-mile stretch of highway in the township, Mayor William Neary said.

"Right now our biggest problem in East Brunswick is trying to find enough places to accommodate the businesses that want to move in," the mayor said Thursday.

As evidence of the thriving business environment, Neary pointed to successes such as the renovations at the Mid State Mall, the $15 million makeover at Brunswick Square Mall, and the arrival in town of Kohl's and Best Buy since he's taken office.

More recently, Lowe's has received Planning Board approval for a store at East Brunswick Plaza, near Kohl's and Circuit City.

The township is about to begin modifications to improve traffic flow at the intersection of Route 18 and Tices Lane that will help local businesses, Neary said.

Patrick Delaney is a real-estate veteran with Jeffery Realty, a firm representing Mid State Mall and Village Green East on Route 18.

"Route 18 is a good regional market," Delaney said. "It has good, strong demographics, and also it's a heavy commuter road."

Delaney, whose company specializes in leasing, sales and development of retail property, also said available space is limited on the Route 18 corridor.

The 377,211-square-foot Mid State Mall, where Best Buy, ShopRite and Borders are located, is 100 percent occupied, Delaney said Thursday.

"Probably for the first time in 15 years," he added. "The owner there did a phenomenal job, renovated it, made it attractive, made deals with national tenants." Village Green East, home to Vitamin Shoppe, also is 100 percent occupied, he said.

Jeffery Realty, based in North Plainfield, also represents the 18 Central Shopping Center on Route 18, where the Gap is located.

Office Depot is doing construction on the old Kids R Us space and plans to open in October, Delaney said. A gourmet grocer has signed a lease for The Wiz space and a dessert shop has taken the space formerly occupied by Wells Fargo Financial, next to the Gap.

The former storefront of Party City, 12,800 square feet, and the Office Max space, 33,000 square feet, are still vacant, he said, and talks are proceeding with potential tenants, including a seafood restaurant.

A proposed $30 million redevelopment of the Golden Triangle -- a 31-acre parcel that includes Sam's Club, the Transportation and Commerce Center and the Route 18 Market -- is in the works.

N.J. pension system considered a dinosaur

Home News Tribune
5/10/05

By KEN TARBOUS
Gannett New Jersey

In the back offices of the state Treasury Department, a small, nondescript division has had a huge impact on the state's public pension funds.

In a little more than two years, the state Division of Investment lost nearly $18 billion - enough to run New Jersey government for six months.

Those losses, along with diminished investment returns, have forced state taxpayers to contribute nearly $200 million to the pension system this year and an expected $1.5 billion in next year's budget, which could be spread over five years.

New Jersey is a dinosaur among pension funds, the lone state that has bureaucrats rather than outside investment professionals managing billions of dollars each day.

Even after the disastrous loss of $18 billion from first-quarter 2000 to July 2002, changes that would make the division more efficient and more responsive to moves in the market have been slow, according to state Treasurer John E. McCormac.

McCormac blamed an archaic system and the State Investment Council, the division's board of directors that oversees the pension investments, for the extended period of losses that drained the once self-sufficient state pension fund from a high of $85 billion in March 2000 to $68.9 billion today.

“There was a reluctance to change. It was ‘buy and hold,’ and it was ‘stay the course.’ Quarter after quarter of negative results was met with, ‘Don't worry. It's only temporary,’” McCormac said. “But three years of bad performance is not temporary.”

James W. Karamanos, 60, of Highland Park is a part-time substitute teacher not enrolled in the state pension system. He's been following the debate over retirement financing and is unhappy with the state’s pension fund.

“Whether it was the bad investments or not, I'm not too pleased,” Karamanos said. “As a taxpayer that directly affects (me).”

He acknowledged the value of his own investments has been drastically reduced in recent years, but he thinks the state must change its outlook.

“The situation leaves something to be desired. We are not fiscally responsible, whether it's the Republicans or the Democrats,” Karamanos said.

State, county and municipal employees, teachers, police and firefighters pay about 5 percent of their salaries into the pension fund system, which invests the money.

Regulations and laws limit the investment portfolio. The fund's market value constantly changes. Portfolio gains and losses are combined with money flowing in from participants and the state, then are paid out in benefits.

As of June 2004, the state's pension fund was invested 66.5 percent in stocks, 26.4 percent in bonds and fixed income, 5 percent in cash, and 2.1 percent in mortgages.

A survey by the California-based investment-consulting firm Wilshire Associates found the median asset allocation of public pension funds to be 62.3 percent in stocks, 26.3 percent in bonds, 3.4 percent in cash, and 2.6 percent in alternative investments as of Dec. 31, 2004.

New Jersey's taxpayers have to support the fund if its return on investments drops below a five-year average of 8.25 percent per year. As of June 2004, New Jersey's five-year average return was 1.5 percent. The median in the Wilshire study was 3.66 percent over that same period.

The investment division, founded in 1950, and the investment council barely acknowledged widely accepted practices of investment and risk management, putting the money mostly in stocks, according to McCormac.

When the S&P 1500 Index, a large group of stocks used to measure how the overall markets are performing, plunged in the early part of this decade, so did the value of the pension fund.

“That's insane,” said Sheryl Gaugler, 50, of North Brunswick, a secretary at Johnson & Johnson in New Brunswick. “We're a rich state, and we can't manage our money?”

Changes pushed

McCormac is pushing for investment diversification and external money managers to increase returns. He wants to move billions of dollars, up to 13 percent of the overall portfolio, out of stock and bonds and the hands of division employees.

McCormac's plan calls for placing that money into alternative investments like real estate and privately owned companies, using the services of private, fee-based investment managers.

The $17.9 billion collapse over two years – nearly a fifth of the total pension fund - and the condition of the pension funds' investment portfolio are the fault of arcane rules and procedures left in place from previous councils and administrations, McCormac said. The council does not invest the money, but rather, is meant to ensure the integrity of the division.

As an example of how poorly the system functioned, McCormac said, the department would meet each Tuesday on “trading day,” deciding which stocks to sell that week and leaving the funds at the risk of the markets' fluctuations for relatively long periods of time.

Bill Clark, the division's new director, said some criticism of the council’s operations is valid.

“In hindsight, it’s probably fair. We had a very good run in the ’90s, and we had pretty big positions (owning millions of shares of one company) in some tech stocks in particular,” said Clark, who has been at the division since 1999 and took over as division director in March. “We probably should have been more aggressive in taking some of those chips off the table.”

But a former division director said selling stocks is not that easy for the state.

The division may hold hundreds of millions of dollars in shares in a particular company, and selling off such a huge amount at once can drive the stock price down.

To stop such a sudden impact, it might take up to 20 days for the state to sell blocks of shares without disturbing the market, said Steven E. Kornrumpf, who served in the Division of Investment from 1971 to 2002. He spent six years as the deputy director and his last four as director.

For example, in the spring of 2001, as shares of New Jersey-based Lucent Technology Inc. nose-dived, the division took 30 days to sell 5.915 million shares at a loss of more than $35 million.

On March 20, 2001, the first sale of 200,000 shares was made at a price of $12.58 each, the highest sale price the state received over the period. The state’s sale price slid to a low of $7 on April 17, 2001. The last sale of the bulk of shares was made for $7.59 per share on April 18, 2001.

State policy defended

But all the finger-pointing by McCormac and current council members sounds like political rhetoric to Roland Machold, a former state treasurer and the director of the Division of Investment for 23 years before his retirement in 1998.

“It’s just dead wrong. We met once a week to make our major decisions,” said Machold, who served under both Democrats and Republicans. He came back as treasurer under Gov. Christie Whitman from 1999 to 2001.

The meetings would bring together all the brainpower of the division, but trading would go on throughout the week, he said. If special circumstances arose, such as adverse stock news or steep price drops, the director or deputy director could make decisions between meetings, he said.

“Remember, we're making long-term investments,” he said. "We were not traders; we were investors.”

Despite ups and downs in market value, the fund has a long life, with money deposited for workers today set to be withdrawn 30 or 40 years in the future, Machold said.

“Volatility over that period of time averages out. If you took the full period, the volatility would be minuscule. That's the reason we were willing to do that,” Machold said.

He presided over much of the fund's windfall years when the market value more than doubled, from $36 billion in 1994 to $85 billion in 2000. By the end of 2002, it had retreated to $58 billion.

Soon after arriving in Trenton, the McGreevey administration cleaned house at the top levels of the division and the council.

In September 2003, Independent Fiduciary Services Inc., brought in by the state to review the division’s operations, called for an overhaul, making about 80 recommendations for changing and updating procedures and policies.

The independent study recommended adding staff. The division handles $68.9 billion with only seven portfolio managers and 10 investment analysts, an addition of one each since the report.

Proposals for growth

Regulations still handcuff portfolio managers from selecting appropriate investment vehicles, according to McCormac. Nearly three years after its $17.9 billion loss, the division is undergoing a slow makeover to streamline procedures ranging from electronic trading to analysis of real-time financial data as suggested by the IFS report, he said.

McCormac said the state has difficulty attracting investment professionals because state employees’ income is based on salaries, not on commissions and bonuses that can top millions of dollars at private investment firms.

McCormac wants to allow outside managers to handle money and diversify the portfolio by placing money in investment classes such as private companies, hedge funds, and real estate that are riskier than stocks or bonds but sometimes have produced larger returns in recent years. When added to a portfolio of more conservative investments, these riskier investments can moderate losses in tough economic times.

“We knew the No. 1 issue was diversification early on,” McCormac said. “Every state around us, every state in the country, had implemented some form of diversification. We had not.”

In late 2002, Orin Kramer, a New York-based hedge-fund manager with significant investment experience, joined the Investment Council. He was named chairman in September.

“There is not another major fund in the United States which is 100 percent internally managed and has no alternative investments,” Kramer said.

Diversifying the portfolio by adding riskier asset classes would reduce overall risk to the pension fund, he said.

Since 2002, the current council has changed the trading and investment procedures to make the division’s work more visible and responsible to the public. As a result, the ups and downs of the fund’s value and the risk of loss have declined, Kramer said.

“The process didn't meet the standards that are expected of major public funds in terms of public disclosure,” he said.

Forcing managers to defend their work at regular meetings reduces risk, he contended. First-rate investors can lose money, he said, but that is not the standard by which investment professionals should be judged.

If 15 percent of the portfolio had been invested in alternative investments over the 10-year period ending last year, the state would have been $9.2 billion richer, Kramer said.

And it wasn't until Kramer's arrival in 2002 that the state became involved in shareholders- rights and corporate governance issues.

New regulations permitting the division to move money out of its control and to private investment firms are still pending, McCormac said.

But the view that outside managers can do a better job has drawn some heat, and there is disagreement as to how much latitude the council has and whether the Legislature has barred certain types or categories of investment.

The New Jersey Education Association, with its 188,000 members paying into the system and drawing pensions, has resisted some of the state’s actions and has filed two lawsuits against the state, NJEA spokesman Steve Baker said.

Baker contended that although the pension fund is sound, the state has not properly been paying its share.

Given the severity of the pension-fund crisis, which will become obvious over the next few years, the structure of the investment portfolio must change, Kramer said. “It would be derelict of fiduciaries to ignore everything everybody knows about modern investment theory.”