In a statement to Pensions & Investments, CalPERS spokesman Joe DeAnda said the pension fund has long been a leader in advocating for fee economies and transparency, including in private equity. “A necessary element in that effort is additional disclosure and reporting from the general partners managing the funds.” He said CalPERS officials have been talking to officials at the private equity firms to help improve disclosure. He did not offer specifics.
The lack of information on fees was brought up during an April 13 investment committee meeting. In a video recording of the meeting, Wylie Tollette, chief administrative investment officer, said CalPERS didn't track private equity performance fees because “profit sharing in the private equity market, in fact the whole private equity industry, (is) embedded in the return.”
“It's not explicitly discussed or accounted for. We can't track it today.”
With more than $40 billion in commitments, CalPERS runs one of the largest private equity programs in the world. For the five-year period ended April 30, CalPERS' private equity holdings earned an annualized 14.4%, making it the pension fund's best-performing large asset class.
The problem, says board member Mr. Jelincic, is during the asset distribution process, when private equity managers deduct their portion of the carry — the profit split between the manager or general partner and limited partners like CalPERS. The issue arises because there is no information on what deductions were taken and how the ultimate fee charged to CalPERS was determined, he said.
He said that makes it impossible to determine if the manager is keeping too much from the sale of portfolio companies and could potentially result in CalPERS paying higher fees because it is not getting the right payout.
“It's like selling your house and having them say, "here are your proceeds,'” he said. ”But we're not saying how much we sold the house for, how much we charged you in commission, how much we charged you in fees.”
CalPERS staffers have said they have been successful in reducing typical management fees paid to private equity managers to 1% from 2% and performance fees to 10% from 20%. CalPERS typically pays the performance or carried interest fee after a private equity fund is able to pay a minimum profit from the sale of portfolio companies, called a hurdle rate, typically 5% to 8%, say CalPERS sources.
At the April 13 investment committee meeting, Mr. Tollette said CalPERS will be requiring additional disclosures by private equity managers to track incentive fees. He said CalPERS is testing a new private equity computer reporting system that can track and capture the data managers provide.
CalPERS statistics for the fiscal year ended June 30, 2014, show that in addition to the $441 million in base fees paid to private equity managers, the pension fund also paid $76 million to global equity managers and $206 million in base fees to real asset managers, including real estate.
The real assets performance fees amounted to another $261 million (excluding a one-time payment of $300 million due to a change in accounting rules). Mr. DeAnda said CalPERS officials would be unavailable for additional comment on the private equity carry fees.
Part of the problem is the lack of an industry standard for how private equity managers calculate performance fees, said Michael S. Falk, a partner at Focus Consulting Group, Long Grove, Ill., a money manager consultant.
“It's not like going to the store knowing the price for buying a loaf of bread,” he said.
Mr. Eliopoulos' manager reduction plan will have its biggest effect on the private equity portfolio. As part of the effort to cut poorly performing managers and trim fees, the number of direct relationships is expected to drop over the next decade to about 30 from 100 as funds expire or CalPERS' stakes in the funds are sold on the secondary market.
CalPERS also has more than 200 manager relationships within private equity funds of funds, some of which will be eliminated. Those that are part of emerging manager funds of funds will be retained if CalPERS officials deem performance to be acceptable.
Mr. Jelincic said he wants the matter of private equity carry fees discussed at open sessions of investment committee meetings. But video recordings of CalPERS investment committee meetings over the last year show that when Mr. Jelincic has brought up the topic, investment staff has said fees should be discussed in closed sessions.