private equity managers

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.

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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.

Photo by rocor via Flickr CC License

Preqin Tells Private Equity to Heed the “Power of the Limited Partner” After CalPERS’ Cuts

Research firm Preqin has released a note reacting to CalPERS’ cutting of private equity managers.

The firm notes that limited partners are beginning to wield more negotiating power, and cautions private equity firms to consider CalPERS’ actions an “effective statement” on the power of limited partners.

CalPERS Is Cutting Its Private Equity Managers, But That Doesn’t Mean It’s Breaking Up With PE

CalPERS announced this week that it was cutting down the number of private equity managers it employs – possibly by as much as two-thirds.

The change comes in the name of cutting costs. A similar rationale was used when the pension fund decided to exit its entire hedge fund portfolio last year.

But unlike hedge funds, private equity will remain a significant part of CalPERS’ investment strategy going forward.

From the New York Times:

Calpers is not planning to significantly reduce its allocation to private equity, though it may redistribute it, Joe DeAnda, a Calpers spokesman, said in an email. He said the pension fund may increase its allocation to individual private equity managers as it culls the number of managers.

As of October, Calpers had $31.2 billion invested in private equity, or about 10.5 percent of its overall portfolio, according to the most recent disclosure. It aims to have 10 percent of its portfolio allocated to the strategy.

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When it comes to private equity, Calpers is also trying to reduce costs. But its approach is more subtle.

Réal Desrochers, the pension’s head of private equity since 2011, announced in late 2013 that Calpers aimed to reduce the number of managers to as few as 100. (DealBook reported on it here.)

In a presentation to the Calpers investment committee in December that year, Mr. Desrochers discussed his review of the pension fund’s private equity portfolio. It included 389 managers at the time.

“I think this portfolio should have — given the size where we are — it should be probably around 100, 120, something like that,” Mr. Desrochers said. (See the 29:15-minute mark in this video.)

In other words, this move has been in the making for a long time.

CalPERS allocates about 10 percent of its assets towards private equity.

Photo by rocor via Flickr CC License

CalPERS Looks to Cut Two-Thirds of Private Equity Managers

As part of its quest to reduce overall costs, CalPERS announced on Monday that the fund would be cutting the number of private equity managers it employs.

The cuts could be deep – the pension fund currently has 291 such managers, but that number could fall to below 100.

General Partners Gain Upper Hand Over Pension Funds As Raising Capital Becomes Easier

Pensions & Investments released an interesting report yesterday outlining the balance of power in the private equity world between general partners and pension funds.

In the last few years, the balance of power has shifted dramatically towards GP’s, according to the report.

From Pensions & Investments:

Until the 2008 financial crisis, general partners pretty much set the rules, leaving most limited partners little say on terms, including on fees and expenses, when they committed to funds. Then fundraising got harder, and even the most popular private equity managers had to accept investors’ demands for lower fees and expenses and a greater degree of transparency.

Now, the highest-returning general partners are regaining the upper hand.

“Certainly, the pendulum has swung more toward the GP compared to 2009,” said Kevin Campbell, managing director and portfolio manager in the private markets group at fund-of-funds manager DuPont Capital Management, Wilmington, Del. The firm was spun out from the pension management division of DuPont’s pension plan in 1993.

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Said DuPont’s Mr. Campbell: “I’ve seen the pendulum of power change positions several different times during the last 15 years,” where private equity fund terms are determined by the GP and sometimes they are more influenced by the LP.

Strong-performing managers that retain the same team and the same investment strategy used when they earned their strong returns have the most influence over fund terms, Mr. Campbell said. These managers also are raising a fund that is similar in size to their last fund and they have a “good investor base,” meaning investors who routinely commit to their funds, he said.

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Some are increasing their negotiating clout by getting large capital commitments from sovereign wealth funds before the first close, enabling them to give other interested institutional investors a take-it-or-leave-it deal, said Stephen L. Nesbitt, chief executive officer of Marina del Rey, Calif.-based alternative investment consulting firm Cliffwater LLC.

Part of the reason GPs have power over LPs has to do with fundraising. GPs are having an easy time raising capital, which means they don’t have any incentive to negotiate terms with LPs. From P&I:

It’s easier to raise capital now; funds are raised more quickly and general partners have more influence on terms, he added.

Indeed, some private equity funds are closing very quickly, with access to much more capital than they need. Instead of holding several fund closings — giving general partners the ability to invest the capital commitments before the final close — a number of firms are having “one-and-done” closings. Because there are asset owners willing to invest on those terms, the GPs have little reason to give in to limited partners demanding changes to fund terms.

For example, Veritas Fund Management in August held a first and final close at $1.875 billion for its latest middle-market private equity fund, after just three months of fundraising. And private equity real estate manager Iron Point Partners LLC in November closed the Iron Point Real Estate Partners III LP at $750 million, well above its $450 million target.

And KPS Capital Partners LP held a first and final closing last year of its $3.5 billion KPS Special Situations Fund IV, above its $3 billion target. It was KPS’ third oversubscribed institutional private equity fund, according to a statement from the firm at the time.

Read the full report here.

Hedge Funds Feel “Pressure” To Reduce Fees

Some major hedge fund managers are feeling “pressure” to reduce fees according to the Wall Street Journal:

Two titans of the hedge-fund and private-equity world say they are growing more open to reducing fees in the face of rising scrutiny of the compensation paid to managers of so-called alternative investments.

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Mr. [John] Paulson [founder of hedge fund firm Paulson & Co.] said he feels “pressure” to act in the wake of “enormous numbers in compensation” for hedge fund managers. Mr. Paulson, 58, earned a reported $2.3 billion last year, counting both fees and the appreciation of his own personal investment in his funds.

“Institutions are becoming a little more demanding…they are putting pressure on the management fee and the incentive fee,” he said Monday during a panel discussion at New York University’s Stern School of Business.

Joseph Landy, co-CEO of $39 billion buyout shop Warburg Pincus, echoed Mr. Paulson’s experience.

“There are a lot of private-equity managers out there who can make a lot of money before they return a dime to investors,” Mr. Landy said. “Most of the pressure [to reduce fees] has been on the actual annual management fee.”

Neither he nor Mr. Paulson, however, were too concerned about any widespread threats to their businesses.

“We came out relatively unscathed from the crisis. We’re doing pretty much the same things we did as before [with] very little restrictions on how we invest the money,” Mr. Paulson said.

Paulson said he think more hedge funds will start using “hurdles”, a fee structure which prevents managers from collecting performance fees until they’ve met a certain benchmark return. From the WSJ:

John Paulson, founder of $22 billion hedge-fund firm Paulson & Co., said he predicted more use of instruments known as hurdles, which bar managers from collecting their traditional 20% performance fee until they have earned a minimum return over a benchmark.

Traditionally, hedge funds are paid for any positive performance whatsoever–even if it falls well short of targets—in addition to a flat annual fee in the range of 1-2% for operating expenses.