The board of directors of NCInnovation (NCI), the private nonprofit given $500 million in taxpayer funds to help commercialize public university research, voted Thursday to select Wells Fargo as the investment manager for NCI from more than a dozen financial institutions who submitted bids.

NCI was awarded the half-a-billion dollar haul by state lawmakers during late budget negotiations in 2023. The taxpayer money is to fund an endowment whose investment returns will be used to finance grants to university researchers. After examining proposals from a total of 17 investment management firms over the last year, the board voted in favor of the Investment Committee’s recommendation of Wells Fargo to manage the $500 million endowment.

The vote was not unanimous, however. While two directors elected to recuse themselves from the vote due to existing or apparent conflicts of interest, three directors — including a former member of the NC General Assembly — cited confusion and conflicting data points in voting against the final selection.

Former NC House Rep. Wayne Sasser, R-Stanly, who served as an appropriations chair during the 2023-2024 session in which NCI was originally funded, voted no on the measure before asking to give comment.

“My concern is and, at least at this point, the only obligation I have is to make this board look like we know what we’re doing for lack of a better word, and I think there was enough confusion — or I’ve been confused through the whole process to be honest with you — that I’m not sure that the legislature, the members that I’ve served with in the house, are going to be real happy with this process, the way it went today,” concluded Sasser.

Who’s on first?

The confusion emanates from an apparent discrepancy involving misrepresented fee rates for one of the final two investment management companies evaluated by the committee to manage the endowment. In discussion prior to the vote, director Blannie Miller, an attorney appointed to the board by former Speaker of the NC House Tim Moore, R-Cleveland, sought clarification on the fee rates for Graystone Morgan Stanley, one of the finalists.

“Whenever we received the response from Graystone, it said that their fee was six basis points,” said Miller. “And the email last night, I believe was the first time that it was articulated as eight percent. […] Is that correct?”

“They had the same tiered schedule that is included in their final presentation on page 23, as a sidebar note, and their calculation of a blended six basis points was an error on their part,” responded staff.

What ensued was a back and forth about whether or not committee members were provided accurate information to make apples to apples comparisons when deciding which company would be awarded the contract to manage the $500 million endowment funded by taxpayers.

“I don’t know what the number is, whether it’s six or eight,” said director Art Pope, also appointed to the board by Speaker Moore. “It is absolutely correct that the prior materials that we were issued with six [basis points fee]. It’s also correct that when you do the math that the blended rate on a $500 million portfolio, with the eight points.”

Staff confirmed to directors that the firm made a mistake in its presented fee rate, but argued the difference in rates was irrelevant in the big picture.

“I respectfully disagree, that it’s irrelevant,” Pope responded. “Two highly qualified firms in Wells Fargo and Morgan Stanley, and they’re both very well qualified, [but it’s] a major factor in a final decision depending on whether Wells Fargo is 50% [more] in advisory fees or 12.5%.”

Staff again confirmed that Graystone Morgan Stanley acknowledged their mistake in the presented rate, also saying the firm committed to honor the mistaken six basis point rate if awarded the contract.

“If they made that big [of] a mistake, I’m not going to vote for them,” concluded Pope.

In further rate debate, Miller suggested the full long term fee schedule from Graystone Morgan Stanley, with a portfolio of $500 million, may actually be lower overall due to discounts for managing funds above $200 million.

fiduciary Responsibility

The Investment Committee evaluated the competing offers based on the committee’s previously determined criteria, among which fee rates were given a 10% weighting.

With an expected investment return on the endowment between $15-20 million a year, the fee rate differences would be nominal, some directors argued. Additional criteria considered were factors concerning each firm’s investment approach, capabilities, and investment returns with similar clients, among other metrics.

Director Ven Poole encouraged the board to put the fee rates in the appropriate context and described his approach to evaluating the finalists.

“[T]he fee is not the driving decision point on which investment advisor you get; you’re going to pick the investment advisor that you think has the capability to implement your investment policy,” said Poole. “We’re going to drive the policy statement, and how we want it invested, and then they’re going to go out and use their skill set to implement iron investment policy state. […] Really what iced it for me was, Wells Fargo had the the technology capability to put guardrails around our investment policy so that their investments and their people that are making the adjustments, never stray outside of our investment policy statement. They use technology to do that. I was quite impressed with that.”

Critics have argued against the use of taxpayer money to fund NCI’s vision for commercializing university research. For their part, the board has committed to protecting the $500 million corpus of taxpayer money as best they can via their choice of manager and the associated investment policy. Considering the nature of the funds, a fiduciary duty to conserve the capital is necessarily more prominent than with a wholly private entity

“I actually liked the idea of more equities initially, right out of the chute, but that’s just my, Ven’s, personal investment policy that he likes to buy,” said Poole. “[I] gave Wells Fargo the opportunity, with a leading question, to make Ven happy and the Wells Fargo person actually pushed back on me and said, ‘[I] really think that it’s a better idea to keep it more conservative in the early stages.’ […] I thought that was something that you really wanted in your investment advisor.”

That sentiment was overshadowed by complicating factors related to, not only data discrepancies, but the appearance of potential conflicts of interest.

conflict?

The board ultimately voted 6-3 to select the investment committee’s recommended firm, Wells Fargo, to manage the endowment. Notably, Wells Fargo is also an NCI donor; a point raised by Miller before the board’s vote.

As a condition of receiving taxpayer funding, lawmakers required NCI to raise $25 million in private capital to fund operations. NCI solicited and received qualifying donations or pledges from a number financial institutions, including Wells Fargo.

“[A}lthough we are acknowledging we are a 501(c)(3) public charity, and therefore not subject to strict prohibitions on these type of transactions, as a public-private entity entrusted with half of a billion of taxpayer dollars, as a board we need to take great care before providing financially lucrative contracts to any donors,” urged Miller prior to the voting ‘No’ on the final selection.

Board director and chair of the Investment Committee, Stan Kelly, also formerly served as regional president of the Carolinas for Wells Fargo, retiring in 2015. Kelly recused himself from the actual board vote, yet still chaired the relevant portion of the meeting.

Moreover, before adjourning the meeting and after considering Miller’s comments suggesting further duty for the board to avoid the appearance of conflicts or unfair evaluations, board chairman and former Truist CEO Kelly King, put the ultimate decision to move forward with the selection to the otherwise recused Kelly.

“I do want to be sure that we’re all very comfortable with where we are,” said King. “[Chair] Kelly, I want to come back to you and say, having heard this., do you, uh, have any interest in going back and doing any more work on this? Or do you want to stand committed, stay put where you are?”

To which Kelly responded, “Mr. Chairman, yeah, from a process standpoint, as was mentioned a number of times this afternoon, the fee was but one component of this consideration and a lesser component than the other considerations. So I feel the other considerations, from a process standpoint, kind of carry the day and we’ve heard that the fee was at best neutral, so I do not think it needs to be revisited.”

While the vote marks an end to a year-long search for an investment manager to run NCI’s tax-funded endowment, the confusion and potential conflicts could invite more questions from lawmakers as they convene for the long 2025 legislative session.

NCI CEO Bennet Waters last appeared before the House Oversight and Reform Committee a year ago, prior to reports of NCI’s struggles with transparency, conflicts of interest, and the threatening of General Assembly oversight staff with legal action.