CalPERS on PE Fees: Staff “Can’t Track It”, But Software Can

CalPERS’ pays billions of dollars in fees to external investment managers each year.

But an official admitted last week that the fees are sufficiently complex that staff “can’t track” them by themselves.

It was revealed at last week’s board meeting that the pension fund uses an algorithm — part of software built for the pension fund by a third party – to track investment fees.

From the Wall Street Journal:

As the nation’s largest public pension funds plunge deeper into complicated investments as a way of chasing returns, they are becoming more reliant on machines to make sense of it all. Some executives worry that a greater reliance on databases, coding and other quantitative tools creates the false impression that they have a better handle on their investments than they actually do.

[…]

In California, Calpers turned to computer models to understand its private-equity costs. Calpers has roughly $26 billion invested with private-equity firms, which buy companies with the goal of earning more in a later sale or public offering. They typically charge pension-fund clients a management fee of 1% to 2% of assets and a performance fee of as much as 20% of the gains when they sell companies for a profit.

Calpers was long unable to separate one set of fees from the other, relying in part on a set of spreadsheets to keep track of the data. The information was also stored in a range of different formats, making it difficult to aggregate and analyze.

It took five years to develop a new data-collection system that relies on private-equity managers to fill out new templates describing their various fees. A data and accounting firm then compiles the information and feeds it into the software program.

The new quantification is changing the way Calpers operates, one official said. It is “motivating us to explore alternative ways of investing in private equity that might have less of a fee burden,” Mr. Tollette said in an interview.

Of course, the algorithms are only as good as the data you give them. And a continuing problem for CalPERS is the fact that many private equity managers hesitate to turn over all relevant data, if any.