Business & Real Estate

CalPERS discloses private equity investment fees: $1.1 billion

The CalPERS tower in downtown Sacramento.
The CalPERS tower in downtown Sacramento. Bee file photo

For months, the investment world has clamored for information about how much CalPERS pays the companies that manage its private-equity investments.

The answer came Tuesday: approximately $1.1 billion in the latest fiscal year, including about $700 million in profit sharing.

Officials with the California Public Employees’ Retirement System acknowledged they are paying a hefty price to invest in private equity, the universe of companies that aren’t traded on any public exchange or market. But they said the cost is justified by the profits, which came to $4.1 billion last year.

“This is a very high-cost asset category,” Chief Investment Officer Ted Eliopoulos said during a conference call with reporters. “It comes with significant costs compared to other asset classes, certainly, but at the end of the day we believe we’ve been rewarded for the risk we’ve taken ... and the costs that we’ve incurred.” He said private equity has been CalPERS’ strongest performer over the years.

The release comes as CalPERS investments in general are coming under more scrutiny. The $295.2 billion pension fund is only about 77 percent funded and is requiring taxpayers and public workers to pay hundreds of millions of dollars in higher annual contributions to shore up its long-term finances. Last week, it agreed to move gradually to a less aggressive investment posture to stabilize earnings, but the decision likely will mean lower profits and even higher annual contributions from taxpayers and employees.

At the same time, CalPERS is working to winnow the number of outside firms it uses to manage its private equity, real estate and other holdings. Eliopoulos said using fewer managers will “reduce cost, complexity and risk in the portfolio.”

CalPERS was criticized in some financial publications after acknowledging earlier this year that it didn’t know precisely how much it was paying outside firms to manage its private equity investments. Private equity consumes about $27.5 billion, or nearly 10 percent of CalPERS’ portfolio.

Eliopoulos said CalPERS wasn’t surprised by the figures released Tuesday. But he said the disclosure is important as the pension fund strives for more “transparency and disclosure to the public” about its investments.

CalPERS and other institutional investors have long disclosed how much they pay in “base” fees to their private equity managers. What’s been unknown is how much they pay in profit sharing. While the outside managers traditionally pocket 20 percent of the profits, those fees are embedded in the returns delivered to the investors and aren’t broken out separately.

For the latest fiscal year, Eliopoulos said CalPERS paid $414 million in base fees and $700 million in profit sharing. He added that for the past three years, CalPERS has paid significantly less than the industry-standard 20 percent in profit sharing, with the figures ranging from 15 percent to 17 percent.

He said CalPERS has earned a total of $24.2 billion in profits since making its first private equity investment 25 years ago. Its outside managers have earned $3.4 billion in profit sharing in that time.

The private equity industry said the figures show how well CalPERS has done by investing in private equity.

“The data released by CalPERS today show the success of its private equity program, and is excellent news for California’s public employees, pensioners, and the state budget,” said James Maloney, spokesman for the Private Equity Growth Capital Council.

Like CalPERS, a lot of institutional investors have been in the dark about how much they were paying their outside private equity managers. In July, a group of state and city treasurers from around the country asked the U.S. Securities and Exchange Commission to insist that private equity firms disclose more fee data.

But it was CalPERS that received the most negative publicity, largely because of its status as the nation’s largest public pension fund. Although the criticism surfaced over the summer, Eliopoulos said CalPERS began developing a system four years ago for cataloging the fees.

The California State Teachers’ Retirement System is among those that don’t track private equity costs. However, CalSTRS spokesman Ricardo Duran said the teachers’ fund is considering setting up a system for cataloging those expenses.

The CalPERS disclosure doesn’t cover all of its private equity expenses. It doesn’t include deals that are no longer active. It also doesn’t include data from the 2 percent of CalPERS’ private equity managers that refused to supply the data to the pension fund. Eliopoulos declined to identify the firms, but said CalPERS won’t invest in more deals with them.

“We will not do business with firms that refuse to provide this information to us,” he said. “It’s that simple.”

State Treasurer John Chiang said he will sponsor legislation next year requiring “full fee disclosure” from any private equity firm seeking investment dollars from public pension funds in California. Chiang sits on the governing boards of CalPERS and CalSTRS.

“Too much compensation information remains missing and no amount of profit sharing returns should cause us to turn a blind eye to demanding full transparency and accountability from firms which call themselves our ‘partners,’ ” Chiang said in a prepared statement.

Among those that did disclose their profit-sharing fees to CalPERS, the biggest profit-sharing dollars went to the fund’s most important private equity manager: Apollo Global Management. The New York firm, which manages billions of dollars for CalPERS, has taken $742.4 million in profit sharing over the years through various private equity funds it runs. No. 2 was The Carlyle Group, a Washington, D.C., firm that has received $432.5 million in profit sharing.

Dale Kasler: 916-321-1066, @dakasler