Everyone knows that Maryland does two things: crab cakes and football. But it turns out there's a third: it also shines a light on so-called "performance" fees charged by private equity groups, a murky business in dire need of greater transparency. 

The public spat between the $49bn Maryland State Retirement and Pension System and the Maryland Public Policy Institute, a think-tank, is a fascinating tale.

The think-tank last month accused the state's pension scheme of paying an estimated $172m in undisclosed performance fees to all of its alternative investment managers, including private equity, hedge fund and commodity managers, in the year to June 30, 2017.

Maryland hit back, saying the accusation was nonsense and the think-tank's analysis was “fraught with inconsistencies and inaccuracies". 

But at the same time Maryland admitted to paying $87.4m in previously undisclosed performance fees to its private equity managers. That figure was paid for the year ended December 2016, the most recent period for which the information is available.

Despite the bombshell admission — and its most recent disclosure of private equity performance fees of $47,000 — Maryland went on the offensive to say its returns would have been even better had it made even greater allocations to private equity.

Still, results are not strong enough to justify its relatively high allocation to private equity. The state pension fund has only delivered a 10-year annualised return of 4.3 per cent, below the 6.4 per cent return of a basic 60/40 index-tracking portfolio made up of US stocks and bonds.

Here's a novel idea that could help Maryland make ends meet. The state fund could invest its cash in a low-cost index-tracking strategy, saving itself $481m a year in fees in the process, according to independent estimates. 

“This would be a safer and more responsible way to run a public employees’ retirement fund than to pay huge sums to investment managers on Wall Street to deliver mediocre results,” said Jeff Hooke, a senior finance lecturer at Johns Hopkins University’s Carey business school and co-author of the report that challenged the fees paid by Maryland.

Read the full story by Chris Flood here.

Be sure to check out some good stuff from the FT's archives on private equity fees here, here and here.

Intelligent curation and exclusive information: This is Due Diligence, the FT’s daily briefing on corporate finance, private equity and M&A. DD is delivered to your inbox Tuesday-Friday at 5am UK time. Meet the team, catch up on previous editions and sign up here. Get in touch with us: Due.Diligence@FT.com

A rush of leveraged loans

Two years ago, Valeant was forced to pay up when it needed to amend the terms on its loans. The company, under investigation by the US Securities and Exchange Commission at the time, was at risk of triggering a technical default on its obligations.

It's a different world for Valeant today, which later this year will rename itself Bausch Health. A surge of demand for floating rate products — like collateralised loan obligations as well as traditional loan funds — has given the drugmaker an upper hand. Read the FT story here.

Valeant secured extra financial flexibility when it refinanced its debt earlier this month and was able to boost the size of its loan by $750m to $4.6bn. But Valeant is not alone. Companies have rushed to take advantage of the loan market, which surpassed the $1tn mark for the first time this year. It now rivals the US high yield bond market in size.

Now, the vast majority of loans are “cov lite”, which lack covenants meant to govern a company’s financial metrics. According to data from LCD, S&P Global Market Intelligence, the number of cov-lite loans in April rose to 82 per cent of loans tracked. That's up from about 20 per cent in 2011. 

Christina Padgett, a loan analyst at Moody’s, told the FT: "There is no point in talking about financial covenants any more, or calling a deal ‘cov-lite’. They are all cov-lite. Cov-lite is the new normal."

Investors have shown no signs of pulling back. Loan funds have counted an accelerating pace of inflows, and CLO issuance is running white hot. Analysts warn that the eroded protections, coupled with a shift by companies from the bond market to the loan market, could spell trouble for money managers in a downturn.

Sony/EMI: Streaming to the rescue

Just seven years ago, EMI was in the hands of a bunch of bankers, seized by Citigroup after Guy Hands failed to outrun the debt he had taken on to buy it just before the financial crisis hit. In 2011, Citi split the business in two, selling the recorded music arm for $1.9bn to Vivendi’s Universal Music and its music publishing business to a consortium led by Sony for $2.2bn.

The buyers’ bet on an upswing in the music business looked bold at the time, but that was before the streaming surge that has brought the beaten-down industry back to growth. On Monday, Sony paid $2.3bn to triple its stake in EMI Music Publishing, putting an enterprise value of $4.75bn on a catalogue of copyrights ranging from “Over the Rainbow” to “Happy”.

You can read Kana Inagaki’s write-up of the deal terms here. As Kana’s analysis points out, this is the biggest deal Sony has done under Kenichiro Yoshida, who took over as CEO in April, its biggest overseas acquisition since it splashed $4.8bn on Columbia Pictures in 1989, and a signal of a newly acquisitive mood at the Japanese electronics and content company.

Our colleagues on Lex say the deal is not cheap, but Sony can afford it — and it is bang in line with Yoshida’s strategy for improving the quality of earnings.

The sellers of the EMI Music Publishing stake will have doubled their money in under seven years. DD readers may remember that Sony’s consortium partners included the Abu Dhabi investment fund MubadalaDavid GeffenBlackstone’s GSO and a name that rang few bells in 2011: Jynwel Capital.

Jynwel has made more headlines since then, as its founder, Jho Low, became caught up in the scandal over 1MDB, the Malaysian state-owned development fund. As a consequence, the US Department of Justice moved to seize Low’s assets. There was no mention of him or Jynwel in Monday’s deal announcement, but he may be playing a more downbeat song tonight.

Job Moves

  • Sam Kendall will become head of investment banking for UBS in the US after leading the bank's global equity capital markets business. Javier Martinez-Piqueras will take over for Kendall as the new global head of the equity franchise.

  • Max Ritter has left Morgan Stanley to join Goldman Sachs as its head of Latin America merger advisory, according to Bloomberg.

  • Thomas Farley will leave the New York Stock Exchange as president of the Big Board to head a special-purpose acquisition company launched by Daniel Loeb’s hedge fund Third Point. NYSE's chief operating officer Stacey Cunningham is set to become the Big Board's first female president. (WSJ)

  • Hazel Yin will become co-head of Freshfields Bruckhaus Deringer’s competition practice in mainland China, based in Beijing. She joins from King & Wood Mallesons.

  • Investment bank Houlihan Lokey has acquired BearTooth Advisors to form a new private funds advisory group. The co-founders of BearTooth, Bob Brown and Andy Lund, will be based in London.

  • JC Penney’s chief executive Marvin Ellison is leaving the struggling department store operator to join home improvement retailer Lowe’s, the companies announced on Tuesday.

Smart Reads

The princes, the president and the fortune seekers The inside story of how top Trump fundraiser Elliott Broidy and his business partner, convicted paedophile George Nader, pushed anti-Qatar policies at the highest level of the US government on behalf of the crown princes of Saudi Arabia and the United Arab Emirates — and how they succeeded. Another story of foreign influence on the Trump team, this one based on a cache of leaked emails between the two men. (AP)

Greed is good? The financial crisis may end up victimising Americans born in the 1980s more than anyone else (like, say, the folks who caused it). (WSJ)

Business class The homogeneity among MBA programmes and students is undermining a vigorous debate about the excesses of capitalism (TNR)

News Round-Up

Santos rejects ‘best and final offer’ $10.9bn bid from Harbour Energy (Fast FT)

Elliott reportedly buys stake in ThyssenKrupp (FT)

Fifa postpones vote on radical tournament shake-up plans (FT)

Altice, a regulatory rocket and an index rejig (FT Alphaville)

GE seeking to shed troubled insurance business (Reuters)

TPG in talks to take over Abraaj Group’s $1bn healthcare fund (WSJ)

Sony’s $2.3bn EMI Music deal signals shift to spending mode (FT)

ICG nears £1.2bn Iris software stake deal (Fast FT)

La Liga chief hits out over Fifa plans for $25bn football shake-up (FT)

Deutsche Bank chairman under fresh investor pressure ahead of AGM (Fast FT)

Sberbank sells Turkish unit DenizBank to Emirates NBD for $3.2bn (FT)

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