The California Public Employees' Retirement System and eight other public pension fund sponsors received understanding but little concurrence for their joint effort to use their clout to try to override what they consider unfavorable fee terms in private equity partnerships.
But the nine pension funds, which released a study last week complaining about some terms of the negotiated investments, achieved some endorsement in their call for improving or standardizing performance measurement of leveraged buy-out, venture capital and other private investment funds.
"We have to focus on net-of-fee returns," said Carl Thoma, principal, Golder Thoma Cressey Rauner Inc., Chicago. His firm manages about $1 billion in private equity and has as clients many of the pension funds who commissioned the study.
"We have to give them a good return net of fees, or we will be out of business," he said. "So net of fees we have to produce.
"I would encourage them to jawbone us all they can. But if the fees are too excessive for them, they shouldn't invest in the funds."
"In the end, if they feel strongly about (adverse) fee terms, then they should walk from the deal," he added.
Mr. Thoma said the terms of private equity funds are market driven.
"The best way to vote (on unresolved complaints) is to pass on a fund," he said.
"It's hard to single out a fund that is charging excess management fees but is earning excess returns," he said, asking rhetorically, "Would you rather have a fund give more favorable terms and a 15% after-fee return, or a fund that has higher fees but has a 20%-plus, after-fee return?"
"I can appreciate where they are coming from," Mr. Thoma added. "You have to listen to what they have to say because they entrust us with the money."
The pension funds believe private equity deals are too lucrative to abandon despite complaints about fee agreements and other terms.
"The potential return and diversification effect of private equity justify making such an investment," said Sheryl Pressler, chief investment officer of the California Employees' fund at a news conference last week, repeating some of the views of the study.
CalPERS was joined in commissioning the private equity study by the California State Teachers' Retirement System, the Public Employees' Retirement Association of Colorado, the Pension Reserves Investment Management Board of Massachusetts, the State of Michigan Retirement System, the Minnesota State Board of Investments, the New York State and Local Retirement Systems, the Oregon State Treasury, and the Virginia Retirement System.
The nine funds have some $500 billion in total pension assets, including $20 billion in private equity investments.
The 87-page report, prepared by William M. Mercer Inc., New York, seeks better alignment of financial interests between general partners and limited partners of private equity funds.
The private equity market has about $100 billion from all investors in outstanding funds, according to the study.
In the first six months of 1996, some $1.6 billion was raised from all investors for venture capital and $6.9 billion for LBO funds, the study noted.
Private equity management fees total $1.5 billion a year, the study reported.
Now that the study has been released, Ms. Pressler said the next step for the group is to propose a standard private equity contract. She said the California Employees' fund and some of the other funds that commissioned the study are drafting a model partnership agreement they would like to serve as a standard for limited partnership funds. She couldn't say when it would be publicized.
None of the pension executives representing the funds commissioning the study mentioned seeking regulatory or legislative changes on terms of private equity funds. They couldn't be reached afterward for their views.
The funds were assisted in providing information for the study by 23 private equity fund managers, including The Blackstone Group, Brinson Partners Inc., Citicorp Capital Investors Ltd., Golder Thoma Cressey Rauner, Hancock Venture Partners, Hellman & Friedman, Kohlberg Kravis Roberts & Co., and TCW/Crescent Mezzanine L.L.C.
None of the private equity funds assisted in preparing the study or received a copy before it was released by the pension funds last week, according to Ms. Pressler.
Executives at other private equity funds who were sought for interviews declined to comment on the study.
Mr. Thoma said he agreed with the study's efforts to improve or standardize internal rate of return calculations of private equity investments and of performance benchmarks. He mentioned one drawback on improving benchmarks might be the managers' reluctance to disclose some proprietary information. But he said a lot of the analytical evaluation of funds can be standardized.
"I view the study as a focus for the future," Mr. Thoma said. "A lot of the issues they raise will ultimately get implemented." n
