One week after winning reduced fees from Apollo Global Management, CalPERS officials are asking all private equity firms that have “significant relationships” with the $213.3 billion system to follow Apollo's lead and cut their fees, Joseph Dear, chief investment officer, said April 26 during a panel discussion at the Milken Institute Global Conference in Los Angeles.
Apollo on April 19 agreed to make $125 million in fee reductions over the next five years on funds it manages for the California Public Employees' Retirement System.
Mr. Dear said the system began looking for ways to cut costs on private equity, hedge fund and real estate because the majority of the Sacramento-based system's overall expense is investment management fees, particularly private equity and real estate funds.
“We're looking at private equity and hedge fund and some real estate for better terms and conditions,” Mr. Dear said.
According to the agreement, released April 19, the reduction in management and other fees applies to funds Apollo now manages solely for CalPERS, as well as to funds it might manage solely for CalPERS in the future.
Apollo also agreed to provide a quarterly certification that it has not used or paid a placement agent, directly or indirectly, to get a CalPERS commitment. CalPERS will fully fund all of its Apollo commitments, according to a joint announcement from Apollo and CalPERS.
The agreement is subject to formal approval by Apollo and the CalPERS board. It also provides that Apollo CEO Leon Black and Mr. Dear may revise the implementation of the contract “as market conditions change and as new investment opportunities present themselves,” according to the agreement.
CalPERS has lost about $420 million in its stake in Apollo Global Management, according to an analysis by Pensions & Investments in December. CalPERS has more than 11% of its private equity exposure in Apollo investments, including its stake in Apollo and commitments to 10 Apollo funds. What's more, former CalPERS board member Alfred Villalobos and his placement agent firm, ARVCO Financial Ventures, successfully marketed five Apollo funds to CalPERS between 2006 and 2008 and helped sell the pension fund on its now-diminished stake in the private equity firm. Those activities are being investigated as part of “pay-to-play” inquiries by the SEC and state officials. Sources told P&I in December that CalPERS officials were negotiating lower fees.
Charles V. Zehren, Apollo spokesman, and Pat Macht, director of external affairs at CalPERS, could not be reached for immediate comment.
Separately, the CalPERS board on April 19 approved a policy change to halt investing in real estate projects that would eliminate rent-regulated apartments, such as New York City's Stuyvesant Town-Peter Cooper Village.
CalPERS wrote off a $500 million investment with Tishman Speyer Properties and BlackRock after the partnership's plan to raise rents at Manhattan's largest apartment complex failed to generate enough income to pay the $3 billion mortgage. The group paid $5.4 billion for Stuyvesant Town-Peter Cooper Village in 2006.
The policy change is intended to head off a more restrictive proposal making its way through the California Legislature. That bill might prevent the fund from investing in affordable housing projects, said Brad Pacheco, a CalPERS spokesman.
Bloomberg contributed to this report.
