CalPERS’ investment practices are getting scrutinized again, this time over the fees it pays to the investment firms that help manage its giant portfolio.
In particular, the California pension fund doesn’t know how much it pays the firms that run its private equity investments – the roughly $30 billion CalPERS has plowed into businesses that aren’t traded on any stock exchange. A CalPERS board member, J.J. Jelincic, said he thinks the annual fees to private equity managers could total $900 million and has criticized the pension fund for not having the data.
“To say ‘we don’t know’ is just nuts,” said Jelincic, himself an employee of CalPERS’ investment office and a frequent critic of the pension fund’s policies. Jelincic has been on full-time leave from his job since being elected to the CalPERS board in 2010.
CalPERS said it’s working to fix the problem. It has been pushing its outside investment firms for the past three years to begin disclosing their fees, and the effort is about to bear fruit. By this fall, when it publishes its financial results for the fiscal year that ended Tuesday, it expects to report how much it’s been paying in fees to its private equity managers, said Ted Eliopoulos, CalPERS’ chief investment officer.
“We’re in a position to collect the information and have it in a format that we feel comfortable to report,” Eliopoulos said in an interview this week. He wouldn’t confirm Jelincic’s estimate of $900 million, saying: “We’re adamant in completing this project and reporting a number based on our actual amounts rather than ballparks or estimates.”
CalPERS spokesman Brad Pacheco said the disclosure is expected to include almost every private equity management firm, although “there may be a partner or two who refuses” to divulge the data.
The pension fund isn’t completely in the dark on its private equity fees. It paid $441 million in “base” fees to its private equity managers in fiscal 2013-14. What it doesn’t know is how much it was charged for performance, or profit sharing. Those fees, also known as carried interest, are embedded in the profits CalPERS receives instead of being broken out separately.
The issue first arose at an April meeting of CalPERS’ investment committee, when chief operating investment officer Wylie Tollette acknowledged the pension fund has been unable to track the fee expenses. That touched off a media tempest of sorts. Financial bloggers began criticizing CalPERS, and The New York Times published a story about it. Edward Siedle, a former Securities and Exchange Commission lawyer who’s now a financial consultant in Florida, announced he’s trying to raise $750,000 on the website Kickstarter to launch his own “forensic investigation” into the matter.
To Eliopoulos and others at CalPERS, the media attention feels like piling on. They say the lack of transparency on management fees runs rampant in the private equity business and isn’t confined to the California Public Employees’ Retirement System.
“Any attempt to show it as a CalPERS issue as opposed to an industry issue does CalPERS a real disservice, in our view,” Eliopoulos said.
To a certain extent, the scrutiny comes with the territory. With a total portfolio of $303 billion, CalPERS is an enormously influential investor. Its decision last fall to unload its $4 billion in hedge fund investments has been a hot topic on Wall Street. The same is true with its recently announced strategy to reduce the number of outside investment managers it hires, in an effort to cut expenses and streamline its investment operations.
Management fees are an important component in CalPERS’ investment activities. The pension fund is still feeling the effects of the 2008 market crash and is 77 percent funded, meaning it has just 77 cents in assets for every $1 of long-term obligations. All told, CalPERS reported that it paid outside investment managers $1.6 billion in fees last year. If Jelincic’s estimate is correct, that number would balloon to around $2.5 billion when the performance fees for private equity are included.
Because so much money is at stake, CalPERS’ critics say they’re justified in putting the pension fund under a microscope. The lack of disclosure on management fees has been festering for a decade with little response from CalPERS, according to Siedle.
The problem “is not unique to CalPERS,” the former SEC lawyer acknowledged, but added: “How has this been put off for so long? How is it that the largest and supposedly most sophisticated investor in the pension world ignored this issue for really the last 10 years?” He said some smaller government pension funds have been able to separate out the fees.
But many institutional investors, not just CalPERS, don’t know or don’t disclose how much they pay in performance fees to their private equity managers.
Ricardo Duran, a spokesman for the California State Teachers’ Retirement System, said CalSTRS can estimate the fees “within a couple of percentage points” but doesn’t report the figure.
“It’s not a number that we track,” Duran said. “It’s not that important to us as a measure of performance.” He said what matters to CalSTRS is the “overall performance of the portfolio.” CalSTRS’ total portfolio totals $193 billion, of which $18.7 billion is devoted to private equity.
The issue of private equity management fees is drawing attention from securities regulators. On Monday the SEC slapped a $30 million fine on Kohlberg Kravis Roberts & Co., one of the leading private equity firms, for improperly charging fees to investors for certain deals during a six-year period.
Leaders of the private equity industry wouldn’t comment directly on CalPERS, but said big institutional investors understand the fees they’re paying.
“Limited partners such as CalPERS are among the most sophisticated investors in the world,” said James Maloney, spokesman for the Private Equity Growth Capital Council, a Washington trade organization. “They understand the investments they’re making, including detailed fund terms. They go through their agreements line by line.”