CalPERS’ private equity fees stable, but faces hurdles in negotiating lower fees

The California Public Employees' Retirement System, Sacramento, paid $689.6 million in base and profit-sharing fees to private equity general partners in the fiscal year ended June 30 and has not been able to wring bigger discounts despite the heft of its $25.9 billion private equity program, system officials and consultants said at an investment committee meeting Monday.

By comparison, for the fiscal year ended June 30, 2016, CalPERS paid $697.1 million, officials said.

Steven Hartt, a principal with consultant Meketa Investment Group, told the committee that the $342.5 billion pension fund has not received "meaningful fee reductions" from general partners that were not also available to other limited partners.

Upon questioning from board members, he said the limited supply of fund investment opportunities from the largest and most successful private equity partners as well as demand from institutional investors have limited CalPERS' ability to negotiate.

Mr. Hartt also questioned whether CalPERS' strategy of reducing its private equity portfolio to 30 core managers by 2020 — it currently has 92 private equity managers — will be effective in reducing fees.

Mr. Hartt said CalPERS should look at co-investment opportunities as a way to reduce fees. Such investments, which give an institutional investor the opportunity to make additional investments in a private equity fund's portfolio companies, are usually offered to limited partners at no fees, he said.

CalPERS statistics show that co-investments made up just $2.1 billion of its private equity program.

CalPERS investment staff did not respond to his report at the meeting. Megan White, a spokeswoman for CalPERS, said the retirement plan has not made any new co-investments in the last two years. She added that CalPERS is waiting for a report from Chief Investment Officer Theodore Eliopoulos on the future direction of the private equity program, scheduled early next year, before deciding on additional co-investments.