To some public pension fund officials, it is a welcome opportunity to get more transparency into fees, along with social protections such as severance and pension protections for workers. "We must increase transparency, close the carried interest loophole, curb runaway executive fees, and strengthen protections for workers. Together we can deliver fairness to our financial system — and build a stronger economy for all of us," said bill supporter New York City Comptroller Scott Stringer, the fiduciary for the five pension funds within the $203.4 billion New York City Retirement Systems, which has 6.4% allocated to private equity.
Pennsylvania Treasurer Joe Torsella has kept the fee disclosure conversation going since 2018, when a special commission he chaired found that Pennsylvania's two statewide pension systems in Harrisburg — the $57.2 billion Pennsylvania Public School Employees' Retirement System and the $29 billion Pennsylvania State Employees' Retirement System — were charged $3.8 billion in unreported fees for private equity, which represents 14.6% and 13.4% of their portfolios, respectively. PennSERS now asks general partners and investment managers of private equity and real estate funds to adopt the Institutional Limited Partners Association's fee disclosure template.
"As state treasurer, and as a board member of our state's two large pension funds, every day I see the problems this bill would help correct," Mr. Torsella said. "I have a fiduciary responsibility to act in the long-term best interests of our beneficiaries, which is why I want to see more power and transparency flow to those beneficiaries and away from the money managers that profit at our expense."
ILPA Principles were first published in 2009 to encourage discussion of alignment of interests in private equity partnerships. The latest edition — ILPA Principles 3.0 — includes a more complete treatment of fiduciary duty to ensure that GPs do not make recommendations that would inhibit their fiduciary duty to LPs, along with emerging topics such as the reasonableness of fees and expenses, subscription lines of credit, co-investment allocations and general partner-led secondary market transactions.
ILPA, whose 520 member institutions represent $2 trillion in private equity assets, supports some of the legislation's ideas but it also looks forward to House hearings and more bipartisan legislation later this year. Along with uniform federal reporting rules for fees and expenses, ILPA officials are concerned about a perceived trend of general partners using legal loopholes to reduce their fiduciary obligations. They would like regulators to make it easier for limited partners to communicate with each other, and to be notified when compliance actions and costs come up.
"Our members are strong believers in this asset class because it delivers returns … and diversification. That being said, we support changes that promote transparency and better alignment between GPs and LPs," said Chris Hayes, ILPA senior policy counsel.
While ILPA is making inroads in getting its principles adopted and larger investors might have successful conversations with their private equity managers, "it is going to take an act of Congress to add to the fiduciary responsibility," said private equity investor and philanthropist Leo Hindery, managing partner of media industry private equity firm InterMedia Partners LLC in New York. "There's nothing intrinsically wrong with private equity; it's the execution of private equity by some" that needs changing, he said.
"It is not anti-private equity, but more about making sure that private equity managers have skin in the game," said Heather Slavkin Corzo, director of capital markets policy at the AFL-CIO and senior fellow at Washington advocacy group Americans for Financial Reform.
To Illinois Treasurer Michael Frerichs, the legislation and the concepts behind it are a way to encourage better governance and management by private equity firms. "We want to ensure the companies we invest in are good long-term investments. Private equity is a powerful tool, one we want to ensure is used responsibly," he said. Mr. Frerichs is vice chairman of the $18.5 billion Illinois State Board of Investment, which manages the defined benefit assets of the State Employees' Retirement System, the General Assembly Retirement System, the Judges' Retirement System of Illinois, and other funds. It has a 7% allocation to private equity.
Susan Chaplinsky, a University of Virginia Darden School of Business professor who teaches courses on private equity, sees limited partners as "increasingly collectively organizing to be more forceful" about the changes they would like to see from private equity firms.