The CIO of America’s largest pension fund is on a mission to scrutinize private equity’s relationship with investors—and wants the industry to do the same thing.
“What is an appropriate management fee? What level of profit-sharing adequately recognizes a manager’s skill and expertise and also fairly compensates the limited partner for assuming the risk?” CIO Ted Eliopoulos put these questions to his investment committee and private equity at large in opening the California Public Employees’ Retirement System’s (CalPERS) latest public meeting on Monday.
“These are questions that deserve renewed attention and consideration,” he continued.
“This conversation may result in greater introspection by the private equity industry, by its array of limited partners throughout the globe, and regulators.”The $300 billion fund plans to cut its roster of private equity relationships by as much as two-thirds as part of a major manager overhaul, Eliopoulos revealed in January. CalPERS had commitments with 291 managers at the time of the announcement.
As investment staffers assess whom to keep and whom to let go, they are also gathering comprehensive data for the first time on total performance fees paid and profits earned by the private equity program. CalPERS’ acknowledgment that it didn’t already know this drew massive public attention, much of it critical.
“In fact, a question was raised about this in the media as to whether staff was actually hiding this information,” Eliopoulos said at the meeting. “I can assure you: That is not the case.” He characterized the fee calculation as “a massive undertaking,” but one CalPERS has made significant headway on.
Approximately 94% of the fund’s private equity general partners have provided fee and profit information via a consistent reporting template, according to the CIO. Despite gathering the vast majority of required data, CalPERS has chosen not to release preliminary estimates of its results. “Given the size of our private equity portfolio”—$29 billion as of March 31—“the expected error in any estimation could be even larger than some entire pension plans,” Eliopoulos explained.
Unlike hedge funds, which CalPERS is in the midst of flushing from its portfolio, private equity will continue to have a place in the pension fund. Interim strategic targets set July 1 aimed for a 10% allocation, up slightly from the existing 9.6%. But judging by Eliopoulos’ comments, managers looking to retain or secure a slice of that should take a hard look at their fees and transparency practices.
“This conversation and the attention it is generating may result in greater introspection by the private equity industry, by its array of limited partners across the globe, and by regulators,” he said. “We look forward to being part of that conversation.”
CalPERS’ report on private equity fee payments is due out later this year.
Source: CalPERS Sample Private Equity Cash Flow Distribution
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