In September, California enacted a law intended to provide transparency with respect to the fees and expenses paid by California public pension or retirement systems to private equity funds, venture funds, hedge funds and absolute-return funds in which they invest. The law goes into effect Jan. 1, and applies to all new contracts, including subscription agreements, between a public pension plan and a private fund entered into after that time. The pension plans also are required to undertake “reasonable efforts” to obtain information required by the law for contracts entered into with private funds before that date.
An existing California disclosure law, the California Public Records Act, already requires that public pension plans, upon request, provide some basic disclosures on the private funds in which they invest, including cash contributions made by the pension plan to the private fund, cash distributions received by the pension plan from the private fund, net internal rate of return and investment multiple of the private fund, and the dollar amount of management fees and costs paid by the pension plan to the private fund. In addition to the information required to be disclosed under the CPRA, the new disclosure law also mandates that a public pension fund obtain from the private funds in which it invests certain information with respect to fees and expenses paid directly and indirectly by the plan to the investment fund, the fund manager and related parties. Specifically, the law calls for disclosure by the public retirement plan at least once annually in a report presented at a meeting open to the public of the following:
• fees and expenses the public pension plan pays directly to the private fund, the fund manager and related parties;
• the public plan's pro rata share of fees and expenses not included in (1) above that are paid from the private fund to the fund manager or related parties;
• the public plan's pro rata share of carried interest distributed to the fund manager or related parties;
• the pension plan's pro rata share of aggregate fees and expenses paid by all portfolio companies held within the private fund to the fund manager or related parties;
• any additional information from the CPRA; and
• gross and net rates of return of the private fund since inception.
Executives at public pension plans and private fund managers alike are starting to grapple with the application of the disclosure law. In doing so, it is becoming clear that implementation of the new law will raise a number of interpretive issues, given its sweeping wording and one-size-fits-all approach.