CalPERS Reveals Long-Awaited Carried Interest Fees

SACRAMENTO, CA—On Thanksgiving Eve, the California Public Employees' Retirement System, or CalPERS, released its long-awaited survey on carried interest fees it had been charged by its private equity investments.

Bottom line: It has paid out $3.4 billion since 1990.

During that same period CalPERS realized $24.2 billion in net gains.

In the 2014-2015 fiscal years, CalPERS realized $4.1 billion in private equity net gains while its external investment partners realized $700 million from profit sharing agreements.

CalPERS broke out the fees it paid to the individual private equity managers. That list can be found here.

This report is, for the normally reclusive private-equity industry, an unusual glimpse into its fees.

CalPERS began pushing for more disclosure from its private equity general partners in 2011.  It apparently had not made much progress until recently because in April of this year, a senior staffer was forced to admit to the pension fund's investment committee members that it was unable to track the carried interest that it had paid out to private equity fund managers over the years. State officials were predictably outraged and pressure was on CalPERS to produce these numbers.

As part of its efforts, CalPERS began working with the Washington DC-based International Limited Partners Association to develop its Private Equity Accounting and Reporting Solution (PEARS), a system to standardized disclosure.

PEARS and the subsequent release of these numbers is a significant step for CalPERS, said Henry Jones, CalPERS Board Vice President and Investment Committee Chair, in a prepared statement. "Private equity is a complicated asset class and the Board and investment office staff will now have even more insight into our program."

Possibly -- so long as the private equity companies continue to cooperate.

For throughout the year, it became clear that CalPERS, despite its heft and influence, was having a bit of difficulty getting the data it wanted. One possible reason might be that, simply put, private equity is in high demand among pension funds and they can pick and choose with whom they work and on what terms. For example, last week CalPERS senior counsel Marte Castanos told Reuters that general partners sometimes play limited partners, such as pension funds like CalPERS, against one another.

"The industry is growing very fast in terms of demand of investors," Réal Desrochers, CalPERS managing investment director of private equity, also told Reuters. "Calpers is an important investor, but a smaller part of the industry."

CalPERS, unfortunately, was also dealing with internal divisions on the issue, according to a recent report in The Capital Weekly. It reported that board member J.J. Jelincic complained to CalPERS CEO Anne Stausboll that CalPERS' own private equity investment staff was giving him "inaccurate, evasive and condescending responses."

These internal staffers are "perpetuating the talking points and mythology of PE fund managers, who are continuously -- and largely successfully -- trying to convince the limited partners (CalPERS and other institutional investors) that they receive a more favorable deal than they actually do," Jelincic wrote in a letter to Stausboll, according to the Capitol Weekly.

So why go through this slog, especially since CalPERS nearly halved the number of private equity funds it deals with?

Again the bottom line: these funds are delivering the best returns, for now at least.

"Private equity has the highest net returns in our portfolio," said Ted Eliopoulos, CalPERS Chief Investment Officer. "As a long-term investor, it is an important piece of our investment strategy and our mission to provide pension benefits for generations to come."