A new law passed by Maryland will force its state retirement system to reveal the true amount it pays outside managers in fees.
The bill, which was passed unanimously by the state legislature and signed into law by Gov. Larry Hogan, requires the Maryland State Retirement and Pension System (SRPS) to begin reporting annually the amount of carried interest it pays on any assets in the system.
Carried interest is earned by investment managers in private markets, such as private equity and private real estate, and is the amount that an investment manager retains as an ownership interest in the investment profits generated by the partnership. Carried interest typically represents 20% of the profits generated, but that proportion may be negotiated among the parties involved.
Because carried interest represents shared profits that are retained by the general partner rather than paid by the investor, it is not typically reported as investment fees paid. However, the new law will change that.
SRPS is subject to a fee cap of 0.5% of the market value of its assets, not including real estate or alternative investments, which are not subject to any fee cap. And the amount of those carried interest fees that haven’t been reported is fairly significant—as much as 35% of total fees, according to a report from The Baltimore Sun.
Maryland’s state pensions system closed out fiscal 2018 with assets of almost $52 billion, and reported investment management fees of $372 million, which represented about 0.72% of assets. However, according to The Sun, the actual amount of fees paid ranged from $460 million to $570 million, which means the system could be paying as much as 1.1% in fees—more than twice its limit.
According to an analysis of the bill from the general assembly’s department of legislative services, calls for greater transparency in the reporting of carried interest over the past five years have led to changes in the investment management industry.
The analysis cited public pension plans, including the California Public Employees’ Retirement System (CalPERS) and the Pennsylvania Public School Employees’ Retirement System (PSERS), which have released reports showing carried interest earned by general partners managing investments on their behalf. It also said that the Institutional Limited Partners Association developed a reporting template that includes carried interest that has been endorsed by many investment managers and public pension funds, including SRPS.
In its initial report, CalPERS reported that general partners earned $700 million in carried interest in fiscal 2015, while PSERS reported that general partners earned $5.17 billion in cumulative carried interest from 1980 through 2017. For calendar 2017, PSERS reported that general partners earned $669 million in carried interest. PSERS also indicated that it took 500 hours of staff and consultant time to generate the report on carried interest.
The bill was sponsored by Maryland Delagate Kumar Barve.
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