Corporate Finance

California Treasurer Wants Private Equity Firms to Disclose Pension Fees

State official says the fees private equity firms charge to public pension funds are excessive and not transparent.
Katie Kuehner-HebertOctober 13, 2015

California State Treasurer John Chiang is calling on the state’s two major pension funds to join his lobbying efforts to force fee disclosures by private equity firms that the funds invest in.

In a letter to the California Public Employees’ Retirement System and the California State Teachers’ Retirement System obtained by Central Valley Business Times in Stockton, Calif., Chiang wrote that the profit strategies private equity firms employ “too often run counter to the values of public fund trustees and their constituents, particularly with respect to the lack of transparency and detail in how much it costs our pension systems to invest in their products.”

Chiang wrote, “I am now urging Calpers and Calstrs to work with me to mop up another private equity industry mess. In the absence of federal rules, I believe state law should require private equity firms to disclose all fees charged to California public pension funds.”

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He added that pension funds and other limited partners pay excessive fees to private equity firms and do not have sufficient visibility into the nature and amount of those fees.

“As fiduciaries, public fund trustees have a duty to maximize investment returns in order to ensure promised benefits are adequately funded and to minimize taxpayer costs,” Chiang wrote. “Because fees paid to private equity general partners reduce returns, trustees should be able see and understand all of the fees they are charged.”

Chaing called on Calpers and Calstrs staff to work with his office to develop legislation to place fee disclosure requirements on private equity firms. He wrote that he would like such a law to be applicable to private equity investments of all public pension funds in California, including the University of California Retirement System, 1937 Act county retirement systems, and all independent retirement systems.

Disclosure requirements would include, but not be limited to, gross management fees, management fee offsets, fund expenses, carried interest, and all other fees as well as related-party transactions, Chiang wrote.

Public pension funds are among the largest investors in private equity, according to Reuters.

Calpers, the country’s largest public pension fund with approximately $293 billion of total market value, was an early investor in private equity some 25 years ago. As of late March, Calpers’ p.e. investments totaled $28.9 billion. Calstrs, which has total assets of about $184 billion, had an allocation of about $18.4 billion in private equity as of late August.

Public pension funds have been under increasing pressure to track fees paid to private equity, Reuters said. Last month, the Institutional Limited Partners Association announced it would seek a better understanding of “all monies paid to the fund manager.” Calpers has said it will begin reporting the amount of carried interest paid to general partners later this year.

In his letter to the pension funds, Chiang applauded these efforts, but noted that “more needs to be done to ensure public pension funds and their trustees have the transparency they need to determine the value of private equity investments.”