The California Public Employees’ Retirement System on Tuesday released a much-anticipated report saying its private-equity managers, such as Blackstone Group LP and Apollo Global Management LLC., reaped $3.4 billion since 1990 under profit-sharing agreements.
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They generally also keep 20 percent of investment profits as carried interest, which is taxed at capital-gains rates.
“The CalSTRS Investment Committee has asked [its staff] for a greater degree of reporting and cost accounting information, which will require additional resources”, said Ricardo Duran, a spokesman for the nation’s second-largest public pension fund.
Few public pension funds across the country report how much of their profits are shared with private equity firms, despite a growing consensus from government officials, regulators, and the public to improve disclosures.
Scrutiny to provide such detail on private-equity costs has escalated in recent months, as Calpers and other public pension funds look to reduce the number of outside managers they partner with and the investment profits they have to share with them. On Tuesday, Invest Europe, a private equity trade group based in Brussels, released a new professional standards handbook for the industry that emphasized the need for heightened standards of “transparency and accountability”, particularly with regard to fees. These figures are based on data from CalPERS new Private Equity Accounting and Reporting Solution (PEARS).
Calpers invests 9.6 percent of its money in private equity, or about $28.9 billion.
CalPERS has been criticized in the media for failing to disclose carried interest, but CIO Ted Eliopoulos defended the private equity program and said the pension had been “rewarded appropriately” for the risks it took.
Millions of public and private sector workers have entrusted their retirement to either pension funds or 401Ks with substantial stakes in private equity investments.
Such profits have become a flash point in the debate over whether taxpayer-financed pension funds should take on the risks and complexity common in private-equity deals, and whether investors are getting their money’s worth.
Tuesday’s statement noted that CalPERS’ private equity program was initially set up in 1990. The asset class has consistently outperformed the fund’s overall assumed return rate of 7.5 percent, but it also routinely misses CalPERS’ benchmarks. Total realized proceeds, meaning return of original investment plus realized net gain, totaled $53.5 billion. “I commend our private equity team for their leadership of the program, and their help with the successful development and implementation of the PEARS system, which will allow us to more meaningfully examine information received from our external investment partners and has already increased the transparency of our program”.
Private-equity managers typically charge investors a 1 percent to 2 percent annual management fee on committed capital that is taxed as income.
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“Comparing CalPERS’ private equity returns with the overall returns of the pension fund and/or their target return for the pension fund is meaningless”, she said.
