Settlement may leave public pension funds out in the cold

SACRAMENTO, Calif. — Fewer private equity, venture capital and hedge funds could be available to public pension funds now that CalPERS will have to reveal fees and profits on each of the funds in its hedge fund program, as well as profits, costs and returns on its private equity and venture cap portfolios.

It's also possible that private equity managers will further restrict the amount of information they give to their public-fund limited partners.

At issue is a settlement reached last week between the $177.8 billion California Public Employees' Retirement System and the California First Amendment Coalition. The coalition had sued CalPERS in San Francisco Superior Court, seeking to force the pension fund to release documents showing the fees and costs of any alternatives investment from 1990 to April 2004.

"We decided to go to CalPERS because they are the biggest target there is," said Peter Scheer, executive director of coalition.

Mark Heesen, president of the National Venture Capital Association, a Washington-based trade group, said he believes other pension funds are likely to be forced to follow CalPERS' lead, either by lawsuit or by public records request.

"I would not be surprised to see another lawsuit," Mr. Heesen said. "It's a slippery slope. It started out with people saying all we want is the (internal rates of return) and now we are at the point of saying they want fees. The next thing will be the entire venture capital contract and after that, information at the portfolio company level."

Some public pension and endowment funds have been releasing internal rate-of-return information for more than a year. Later last year, CalPERS reached a settlement with the San Jose Mercury News to release similar data, and the fund has been updating the information on its website ever since. Since then, the CalPERS' website has been used as a model by other public pension funds.

None, however, has revealed rates of return for each of its hedge funds.

Until now, CalPERS released only monthly return information on its entire hedge fund program, without specifying separate returns for each hedge fund investment, said Brad Pacheco, CalPERS spokesman.

So far, none of the funds in CalPERS' hedge fund program has shown a profit or gain, although the aggregate monthly returns reported to the board have been good, Mr. Pacheco said. Although the allocation was approved in 2000, assets were not invested in hedge funds until 2001 and 2002, he explained.

No public pension fund contacted by Pensions & Investments for this story has yet decided to follow CalPERS' lead and provide profit and cost information for the fund's hedge fund, venture capital and private equity investments.

Executives of the $34.7 billion Massachusetts Pension Reserves Investment Management Board, Boston, are discussing whether to reveal more than top-level return information for its $1.6 billion hedge fund portfolio, but "have not yet determined what the policy will be," said Eileen O'Connor, communication director for the state treasurer's office.

The $43.9 billion Oregon Public Employees Retirement Fund, Salem, reveals private equity costs and fees annually in the aggregate but not by fund; it reveals internal rates of return for each fund. Oregon has $4.1 billion in private equity, but doesn't invest in hedge funds.

"Generally, we try to comply with all record requests, and there's not been anything we have been looking at recently, but that's not to say we won't," said Kevin Max, Oregon fund spokesman. "CalPERS is the only one and it is all new, and I'm sure plans everywhere will be looking at this and deciding what move they will make."

The board of the $30.9 billion Colorado Public Employees' Retirement Association, Denver, rejected investing in hedge funds earlier this year, said Katie Kaufmanis, fund spokeswoman. As for the 9.2% of fund assets invested in private equity, a law passed last year allows the fund to disclose only the return information it already reveals on its website, she said.

"We will not include any more detail in the report on alternative investments than is currently posted," Ms. Kaufmanis said. "Colorado statute protects PERA's proprietary information related to investments in private equity."

Officials at the California State Teachers' Retirement System, Sacramento, has no firm plans to follow CalPERS' lead in revealing cost and profit information for its $5.7 billion private equity portfolio, said Sherry Reser, communications director for the $118.7 billion fund. "It is something we might do in the future … but at this point it has not come up for us," she said. "We absolutely operate at a high degree of transparency at this time and certainly want to be transparent as possible in terms of releasing meaningful information about our investments."

In Texas, meanwhile, two state pension funds are challenging an order by Texas Attorney General Greg Abbott that would require release of private equity and venture capital information — including historical valuation, transaction and investment performance data for years up to 2003.

The $80 billion Teacher Retirement System of Texas, Austin, sued after Mr. Abbott's July opinion that the system should provide private equity fund information. In 2002, the University of Texas Investment Management Co was told by the state attorney general's office that it should disclose rates of return for private equity funds.

Under the California settlement, CalPERS is revealing the dollar amount of gain or profit the system received from each fund for calendar years 1999-2003 and management fees and other costs paid by CalPERS to the funds for calendar years 2001-2003. Data for 2004-2005 will be released in the future. CalPERS has $21.1 billion in private equity and $2 billion in hedge funds.

The CalPERS data show a number of funds have yet to produce a profit, including those from such well-known names as Silver Lake Partners LP, Oaktree Capital Management LLC and Lexington Partners Inc.

CalPERS pays slightly more than $200 million annually in management fees to 416 private equity funds that already have $13.5 billion in investments and another $21.1 billion in commitments, according to the now-public data.

In 2003, the largest fee — $8.1 million — was paid to Lombard/

Pacific Partners; CalPERS has had $347 million invested in with Lombard since 1995. The fund returned a profit of $32 million as of 2003.

But the NVCA's Mr. Heesen said that the information provided by CalPERS does not show how a private equity or venture capital fund is truly performing. Funds normally do not show a profit until they start selling their portfolio companies or take them public, which is toward the end of funds' 10-year investment period, he explained.

Mr. Heesen also said the new batch of data could cause more venture capital funds to reject public pension funds as investors, especially with so many institutional investors trying to invest money in the asset class. "More and more firms are hitting their (fund-raising) targets."

"We're at the point in the fund-raising cycle that it is easier today to reject public pension fund money," Mr. Heesen said. "So many entities want to get into private equity and other limited partners don't want public pension plans in them."