private equity investments

CalPERS to Cut Investment Fees by 8 Percent Next Year

CalPERS calculates that it will cut investment-related fees by 8 percent in fiscal year 2015-16, according to a report by Bloomberg.

The pension fund has been looking to cut costs recently by reducing the number of private equity managers it invests with and moving more investment management in-house.

According to CalPERS’ proposed budget, obtained by Bloomberg, the 8 percent decrease in fees will come from several areas:

Calpers projects it will pay about $100 million less in fees for hedge-fund investments. The pension has said it would take about a year to unwind all its holdings. It paid $135 million in fees in the fiscal year that ended June 30 for hedge-fund investments, which earned 7.1 percent and added 0.4 percent to its total return, according to Calpers figures.

Brad Pacheco, spokesman for the pension fund, wasn’t immediately available for comment.

Base fees for private-equity investments are projected to decline 7.5 percent to $440.6 million as some investments matured, the number of managers was reduced and Calpers won better terms for new deals.

Base fees for company stock managers are projected to increase 25 percent to $51.3 million. Fees for performance are projected to decrease by $32.6 million because of favorable renegotiated contract terms, Calpers said.

[…]

The largest U.S. state pension fund, known as Calpers, projects that it will pay $930.7 million in base and performance fees to investment firms in the fiscal year that begins July 1, down from more than $1 billion this year and $1.3 billion last year, according to the fund’s proposed budget.

CalPERS managed $295.8 billion in assets as of December 31, 2014.

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Preqin: More Pensions Invested in Private Equity, But Average Allocation Down From 2013

Data from Preqin shed some light on private equity activity in 2014, and showed that more public pension funds invested in private equity in 2014.

Even still, public pensions’ average allocation to private equity has dipped slightly since 2013.

From ThinkAdvisor:

Preqin, the investment alternatives data provider, found that the number of active U.S.-based public pension funds in private equity has risen year over year, from 266 in 2010 to 299 in October 2014. The average allocation to private equity was 7% as of October 2014, down from 7.2% a year earlier.

Preqin said private equity looked set to remain an important component of U.S.-based public pension funds’ portfolios for years to come, offering investors good portfolio diversification and outsized returns over the long term.

Fundraising for the year was likely to be strong, Preqin reported, with $254 billion raised by funds that closed in the first half.

A record 2,205 funds are currently in the market seeking an aggregate $774 billion, compared with 2,098 funds that were looking to raise $733 billion in January.

Preqin also reported that its internal data showed co-investment would increase in 2014. It acknowledged that concerns about high expenses and competition were holding back some general partners from offering co-investment opportunities. But researchers found that co-investment figured prominently in the plans of many GPs and limited partners.

Preqin said that as the private equity industry matures and investors become more sophisticated, co-investment activity could increase, with benefits for both fund managers and limited partners.

Preqin also found that venture capital funds raised more money in 2014 than in 2013.

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Exploring the Relationship Between Pension Funds and Private Equity Firms

Finance blog Naked Capitalism has published a long interview with Eileen Appelbaum and Rosemary Batt, authors of Private Equity at Work, a book that dives into the inner-workings of the PE industry.

Part of the Naked Capitalism interview, conducted by Andrew Dittmer, covers the relationship between limited partners (pension funds) and general partners (PE firms). Here’s that portion of the interview:

Andrew Dittmer: In general, LPs seem to have a pretty submissive attitude toward GPs. Where do you think this attitude comes from?

Rosemary Batt: One cause is the difference in information and power. Many pension funds don’t have the resources to hire managers who are sophisticated in their knowledge of private equity firms. They don’t have the resources to do due diligence to the extent they would like to, so they need to rely on the PE fund, essentially deferring to them in what they say.

Eileen Appelbaum: I think that there is a reluctance to question this information or to share it with other knowledgeable people – they are afraid that if they do, they will not be allowed to invest in the fund because the general partners will turn them away.

I attended a lunchtime lecture recently, the title of which was “How is it that private equity is the only industry in which 70% of the firms are top-quartile?”The general partners have found ways to persuade their investors that they are the top-quartile funds, that “you will make out best if you invest with us,”and “we’re very particular – if you can’t protect our secret sauce, we aren’t going to do business with you.”

The other side of it is that some of the pension funds have their own in-house experts, and some of them believe they’re smarter than the average bear – there’s a certain pride in their ability to get the best possible deal, better than other LPs can get.

It’s the lack of transparency. With more transparency we’d have a lot less of these problems.

Rosemary Batt: Another issue is yield – often they’re thinking, “We need to be investing in private equity or alternative investment funds because this is the only way to get higher yields.” There’s a kind of halo effect, if you will, around the private equity model – many people think it really does produce higher returns without really having the knowledge. In some cases, there are political battles that have to be fought to get legislators to make a decision not to invest in these funds.

Eileen Appelbaum: Often the person who is appointed to make the decisions about private equity investments comes from Wall Street, maybe even from a PE background.

[…]

Eileen Appelbaum: Rose and I did a briefing at the AFL for the investment group. We had investment people from both union confederations who are concerned about the fact pension funds are putting so much money into private equity. They told us that they had never been able to see a limited partner agreement until Yves Smith published them. The pension fund people are so afraid of losing the opportunity to invest in PE. Some general partner could cut them off for having shared the limited partner agreement. Unbelievable.

This is the only section of the interview that deals explicitly with pension funds, but the whole interview is worth reading. You can read it here.

Ontario Teachers’ Pension Names New Director of Europe, Middle East and Africa Investments

The Ontario Teachers’ Pension Plan has appointed private equity veteran Jo Taylor to the post of Managing Director for Europe, Middle East and Africa (EMEA). Taylor will also head the pension fund’s London office.

From an OTPP release:

In his new role, Mr. Taylor retains primary responsibility for Teachers’ Private Capital and private equity investments in the region while assuming oversight for the full cycle of opportunity origination, analysis, value creation and execution of investment activities across asset classes.

In addition to setting the tone and direction of Teachers’ investment activities in the EMEA market, Mr. Taylor, who joined the organization in 2012, will guide all advisory relationships within the region and becomes a member of Teachers’ Investment Committee.

“Jo’s expanded role reflects our commitment to growing our global presence and deepening our long-term relationships with our partners in key markets. His experience, relationship-building skills and his deal and market knowledge make him the ideal person for this new position,” said Neil Petroff, Teachers’ Executive Vice-President and Chief Investment Officer.

Teachers’ will be opening an expanded London office at Portman Square in 2015 to accommodate a larger, multi-asset-class team. Teachers’ established its London office in 2007. It has a diverse portfolio of assets in the region valued at approximately $21 billion as of December 31, 2013.

The Ontario Teachers’ Pension Plan manages $140 billion in assets.

NYC Pension Appoints New Heads of Private Equity, Hedge Fund Investments

The New York City Bureau of Asset Management – the entity that manages assets for the city’s retirement systems—has appointed two staffers to head its private equity and hedge fund investments, respectively.

The backgrounds of the appointees, from Chief Investment Officer:

Effective immediately, NYC’s comptroller appointed Alex Doñé as head of private equity and Neil Messing to take over the hedge fund portfolio.

Doñé has worked at the bureau, investing the city’s five pension funds, since 2012. Prior to the promotion, he served as the fund’s executive director of private equity and oversaw its $5.6 billion emerging managers program.

He spent the bulk of his earlier career in the private sector, with 16 years of experience in investment banking and private equity. Doñé has worked at Clearlake Capital Group, KPMG Corporate Finance, and Merrill Lynch. For two years, he served as a presidential appointee at the US Department of Commerce’s Minority Business Development Agency.

The NYC pensions’ new head of hedge funds likewise built his background in the private sector before becoming an asset owner in 2011. Messing most recently served as the fund’s senior investment officer responsible for hedge funds. According to the NYC comptroller’s office, he “built and managed a diversified $4 billion portfolio of direct hedge fund investments and a fund-of-hedge funds” for the pensions.

The CIO of the city’s pension system commented on the appointments:

“The appointment of Alex and Neil will strengthen the investment operations of the Bureau of Asset Management,” said Scott Evans, CIO of the New York City Pension Funds. “Alex and Neil are ethical and sophisticated investment managers and I am excited to see them take on new roles as part of senior leadership.”

The New York City Bureau of Asset Management manages $160 billion in assets for the city’s pension systems.

Siedle: For Pension Funds, Private Equity Deals Can Come With Baked-In Conflicts of Interest

Over at Forbes, the “pension detective” Ted Siedle has penned an extensive column delving into the contractually-permitted conflicts of interest that can accompany private equity deals.

He hones in on Bruce Rauner and his firm, GTCR, which handled assets for numerous pension funds. Rauner and GTCR encapsulate the secrecy and potential conflicts of interest that pension funds can sign off on when they hand assets over to private equity firms.

Siedle writes of Rauner:

According to a report by Council 31 AFSCME Illinois, a few years ago Rauner’s firm received millions in Pennsylvania state pension assets to invest after a $300,000 campaign contribution to that state’s Democratic governor. In Illinois, a company owned by Rauner paid a member of the Illinois Teachers’ Retirement System Board more than $25,000 a month. His firm was selected to handle TRS pension dollars. The TRS member, Stuart Levine, is now in federal prison for public malfeasance.

It seems Rauner mastered the art of accessing public pension assets to manage, including (according to his firm’s SEC filings) reliance upon placement agents which have proven to be so controversial at public pensions across the country.

In my opinion, before Rauner can be deemed fit to serve as governor of Illinois, an in-depth review of his secret dealings with state pensions is called for– especially since the state’s pensions are in a crisis (which merits investigation) and 4 out of the state’s 7 last governors ended up in prison. The last thing Illinois needs is to compound its pension problems.

If Rauner wins, expect questions about his past and ongoing private equity business dealings to continue to swirl. In my forensic experience, greater scrutiny of opaque investments always reveals weaker investment performance.

Siedle dug through GTCR’s SEC filings. He found that when pension funds signed deals with the firm, they were often also permitting GTCR to engage in a multitude of scenarios that could lead to conflicts of interest for the firm. Siedle writes:

The litany of permissible conflict of interest scenarios (many of which are commonplace throughout private equity) detailed in Bruce Rauner’s firm SEC filings, should be disturbing to any so-called sophisticated investor. Unfortunately, public pensions routinely consent to such potentially harmful conflicts either because they don’t read, don’t fully comprehend the oblique disclosures, or simply don’t care that politically-connected insiders may be profiting at the expense of stakeholders. For example:

“The Adviser and certain employees and affiliates of the Adviser may invest in and alongside the Funds, either through the General Partners, as direct investors in the Funds or otherwise (emphasis added)…

The Adviser and its related entities may engage in a broad range of activities, including investment activities for their own account (emphasis added)…

The Adviser may, from time to time, establish certain investment vehicles through which employees of the Adviser and their family members, certain business associates, other “friends of the firm” (emphasis added) or other persons may invest alongside one or more of the Funds.

In certain cases, the Adviser may cause a Fund to purchase investments from another Fund, or it may cause a Fund to sell investments to another Fund.”

Translation from legal-speak: Rauner and his associates could invest directly, or create a special “family and friends” fund which could invest, at lower cost in shares of the same companies his firm purchased for funds in which public pensions invest. The associates, or “family and friends” fund, could profit by holding onto those shares, or immediately flip them, selling to the funds in which public pensions invest at a guaranteed, riskless mark-up.

Alternatively, GTCR could sell start-up companies it founded (or the family and friends fund could sell companies it purchased from GTCR) to funds the firm managed for public pensions at inflated prices.

“In addition, the Adviser may, from time to time, fund start-up expenses for a portfolio company and may subsequently sell such portfolio company to a Fund. Such transactions may create conflicts of interest because, by not exposing such buy and sell transactions to market forces, a Fund may not receive the best price otherwise possible, or the Adviser might have an incentive to improve the performance of one Fund by selling underperforming assets to another Fund in order, for example, to earn fees.”

Improve the performance of the friends and family fund by selling the laggards to other GTCR funds in which public pensions invest? Seems possible, based upon the firm’s SEC filings.

Read Siedle’s full column, which contains more analysis and insights, here.

New York Comptroller Candidates Spar Over Private Equity Pension Investments

In the race for New York State Comptroller, incumbent Thomas DiNapoli is guarding a comfortable 20-point lead in the polls.

But his challenger, political unknown Bob Antonacci, isn’t holstering his guns quite yet.

Both candidates over the weekend sparred about the place of private equity in New York’s pension portfolio.

Under DiNapoli, New York’s Common Retirement Fund (CRF) allocates 8 percent of assets to private equity. Antonacci thinks that’s far too much.

From the New York Post:

DiNapoli’s challenger in the state comptroller’s race warned that private-equity investments look good now, but can turn bad very quickly.

“Private-equity investments can be very risky,” says Republican Bob Antonacci.

He agrees that it is a good idea to diversify state retirement portfolios beyond stocks and bonds. But 8 percent in private equity is excessive, he says.

“I think the problem is that he (DiNapoli) is putting too much emphasis on risky investments,” Antonacci said.

He added that the comptroller is seeking out chancier investments because his goal is to obtain a 7.5 percent return a year. That, Antonacci adds, is an unrealistic expectation.

“We are taking chances on getting returns that aren’t going to be there in the long run,” Antonacci says.

DiNapoli’s office responded:

“The comptroller sees private equity as diversifying the investment portfolio and getting better investment returns,” says DiNapoli spokesman Matthew Sweeney.

[…]

The recent numbers show that using private equity reduces risk through portfolio diversification, DiNapoli’s spokesman said. That, he adds, reduces risk.

New York State and Local Retirement Systems earned 14.9 percent over the past decade on the private equity part of the investments, according to a new report from the Private Equity Growth Capital Council (PEGCC).

The State Comptroller oversees $181 billion in pension assets. Recent polls have DiNapoli leading Antonacci, 58 percent to 31 percent.

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Louisiana Teacher’s Pension Defends Private Equity Investment With Carlyle

The New York Times recently obtained a copy of private equity limited partnership agreement that demonstrated how opaque the world of private equity is.

The agreement in question was for the Carlyle V fund – a fund that, as Pension360 covered, many public pension funds have invested in.

One such fund is the Teacher’s Retirement System of Louisiana, and it is now defending its private equity investments in light of the New York Times’ story. From the Baton Rouge Business Report:

The Teachers Retirement System of Louisiana…is responding to questions raised by a recent article in The New York Times about one of the private equity funds in which TRSL has invested.

The investigative report, published Sunday, details a “code of secrecy” it says exists between many large private equity funds and the state pension systems that invest in them. According to the story, pension systems are often hit with fees and the tab for hefty legal settlements incurred by the funds, without the knowledge of system members.

The story cites TRSL’s investment in the Carlyle V fund as one such example. It points to provisions in TRSL’s contract with Carlyle V that protects the fund’s partners from certain liabilities that investors—TRSL members—could ultimately have to pay.

TRSL defends its investment in Carlyle V, saying TRSL managers evaluate all investment opportunities and recommend investment only in funds with the best track records, terms and risk/return profiles.

“For the past 10 years, private equity investments have been TRSL’s highest performing asset class,” says Philip Griffith, TRSL chief investment officer. “Carlyle has been one of the system’s better-performing private equity funds.”

Griffith notes that TRSL’s total investment return in FY 2013 was 19.9%, the second-highest in the nation.

“Private equity returns were key to achieving this distinction,” he says.

State Treasurer John Kennedy, who sits on the TRSL board, declines to comment.

TRS Louisiana manages $17.5 billion in assets.

To read a copy of the Carlyle V agreement, click here.

Redacted Document Demonstrates Secrecy Surrounding Pension Funds and Private Equity Investments

The New York Times recently obtained a copy of a private equity limited partnership agreement from Carlyle Partners, and the document offers outsiders a rare peak into the opaque world of private equity investments.

[Document can be viewed at the bottom of this post, or by clicking here.]

The document is heavily, heavily redacted, but it’s important because it reveals just how few details are publicly available regarding the private equity investments of pension funds.

Many pension funds sign agreements just like this one – in fact, the list of pension funds that invest in Carlyle funds is long:

New York City Retirement Systems

CalPERS

CalSTRS

Illinois Teachers’ Retirement System

Florida State Board of Administration

Michigan Retirement Systems

Texas County & District Retirement System

New Mexico Public Employees Retirement System

Los Angeles County Employees’ Retirement Association

and many more.

Pension360 has previously covered how private equity firms encourage pension funds not to comply with FOIA or public records requests pertaining to private equity investments.

That sentiment is reflected in the Carlyle agreement, which pushes pension funds to resist public records requests if possible. From the New York Times:

Another blacked-out section in the Carlyle V agreement dictates how an investor, like a pension fund, also known as a limited partner, should respond to open-records requests about the fund. The clean version of the agreement strongly encourages fund investors to oppose such requests unless approved by the general partner.

Some pension funds have followed these instructions from private equity funds, even in states like Texas, which have sunshine laws that say “all government information is presumed to be available to the public.”

For an in-depth foray into the redacted elements of the agreement and its implications, head over to this Naked Capitalism post or the New York Times article.

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Some Private Equity Firms Want More Opacity In Dealings With Pension Funds

Private equity firms are growing uncomfortable with the amount of information disclosed by pension funds about their private equity investments.

PE firms are cautioning their peers to make sure non-disclosure agreements are in place to prevent the public release of information that firms don’t want to be made public.

Stephen Hoey, chief financial and compliance officer at KPS Capital Partners, said this, according to COO Connect:

“We had correspondence with a municipal pension fund relating to the Limited Partner’s inquiry regarding the SEC’s findings from our presence exam. We objected to our correspondence with the LP of matters not relating to investment performance including notes taken by the LP representatives being submitted to reporters under the Freedom of Information Act (FOIA). It is our communications with LPs other than discussions about performance metrics that we object to being in the public domain.”

Pamela Hendrickson, chief operating officer at The Riverside Company, said PE firms should know exactly what pension funds are allowed disclose to journalists. From COO Connect:

“GPs should make sure their LP agreements and side letters are clear about what can be disclosed under a Freedom of information request. GPs must comply with any non-disclosure agreements they have with their portfolio companies and information provided under the Freedom of Information Act should be restricted to ensure that the GPs remain in compliance,” said Hendrickson.

It’s already very difficult for journalists to obtain details and data regarding the private equity investments made by pension funds.

But PE firms are worried that the SEC will crack down on fees and conflicts of interest:

The SEC has recently been questioning private equity managers about their deals and fees dating all the way back to 2007. There is speculation the US regulator could clamp down on private equity fees following its announcement back in 2013 that it would be reviewing the fees and expenses’ policies at hedge funds amid concerns that travel and entertainment costs, which should be borne by the 2% management fee, were in fact being charged to end investors.

“The SEC is taking a strong interest in fees, and this has become apparent in regulatory audits as they are heavily scrutinising the fees and expenses that we charge. Following the Bowden speech, we received a material number of calls from our Limited Partners whereby we explained our fee structure and how costs were expensed accordingly. We also pointed out that our allocation of expenses was in conformity with the LP agreements, which is the contract between the General Partner and a fund’s limited partners,” said Hoey.

COO Connect, a publication catering to investment managers, encourages PE firms to use non-disclosure agreements to prevent the public release of any information the firms want to remain confidential.

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