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On the one hand, it’s encouraging to see other public pension funds taking up the call by California Treasure John Chiang for full transparency on private equity fees, as well as disclosure of related party transactions. As we’ve stressed, the latter part of Chiang’s proposal for a legislative requirement that public pension fund investments be limited to private equity funds that agreed to those disclosures, is essential to curb private equity grifting. As major investigative stories by the Wall Street Journal and New York Times, as well as some of our posts, have exposed, and the SEC has confirmed, a considerable amount of chicanery takes place via transactions entered into between the companies that the private equity funds buy, and affiliates of firms and individuals close to the general partner. The only way to have any hope of curbing this rent extraction is to force it into the open.
While CalPERS has not formally endorsed Chiang’s plan, in an unorthodox move, CalPERS’ staff has usurped the role of the board in setting legislative policy by telling one of the major private equity publications that it supports Chiang’s proposed legislations. Since CalPERS’ board is unduly deferential to staff, and it is separately hard to make a credible case for opposing Chiang’s proposal, it’s close to certain that the California giant will officially back Chiang’s initiative.
In an important indicator that revelations of private equity misconduct are finally forcing public pension funds to act, both the Missouri state treasurer and the New York City public pension fund system have endorsed the idea of more fee disclosure. But bear in mind that these are endorsements of the general concept of more transparency, when the devil lies in the details. In neither instance is anyone yet calling for new legislation.
In addition, in the case of the New York City pension system, what is being billed as a push for full transparency falls well short by virtue of failing to capture all portfolio company charges. As one expert wrote us, “NYC either knows this and doesn’t care or doesn’t know which is scary.” By contrast, the Missouri treasurer appears to be backing a broader effort.
First on the New York City initiative. New York City’s five pension plans constitute the fourth largest public pension program in the US. From an article in Private Equity International:
NYCRS sent a letter to all of its private markets and hedge fund managers Wednesday, demanding more complete disclosures on current and historical fees by the end of 2015.
The letter, penned by chief investment officer Scott Evans, requests that all GPs and other private markets managers submit capital call and distribution notices that are in full compliance with the latest template from the Institutional Limited Partners’ Association (ILPA).
Each manager must also provide a single, one-time historical analysis with full transparency on the dollar amounts of all base fees, performance fees, other fees and offsets charged by the funds to NYCRS, in accordance with the new ILPA Quarterly Fee template, going back to the inception of each pension’s investment in any fund.
What would not be obvious to a reader of this article is that the ILPA template is inadequate. and would miss abuses that have recently been the subject of settlements with the SEC, such as its most recent high-profile action, its $39 million Blackstone order. One of the agency’s wet-noodle slaps involved Blackstone charging “termination of monitoring fees” which were not set forth in the limited partnership agreement, and were thus not subject to fee offsets (application of a portion of those fees against the annual fees), as investors had assumed. The fact that the New York City pension system is blithely backing an obviously-deficient remedy raises the question: does the staff really not get it, or are the political officials not willing to cross swords in a meaningful way with private equity firms, particularly given their heavy local presence and outsized sway in local elections?
In Missouri, state treasurer Clint Zweifel appears willing to take serious action. What is amusing, if also disconcerting, is how the executive director of the public pension fund, MOSERS Missouri State Employees’ Retirement System) raises ludicrous objections Zweifel’s call to get to the bottom of the fee matter. From Pensions & Investments:
Missouri Treasurer Clint Zweifel sent a letter on Wednesday to the $9 billion Missouri State Employees’ Retirement System, Jefferson City, requesting it formulate a system to measure the total fee cost of private equity investments.
The request follows Mr. Zweifel adding his name to the letter sent Tuesday to SEC Chairwoman Mary Jo White by a number of state and municipal treasurers and comptrollers calling for an industrywide standard to give private equity limited partners more transparent and frequent information on fees and expenses.
By contrast, the same article shows the executive director foot-dragging by making spurious objections:
“The thing I hope people understand is that our activity is net of fees,” said Gary Findlay, MOSERS executive director, in a telephone interview, “so essentially what’s happening is, if you better identify the additional fees beyond what we’re able to capture, all it means is your gross return increases and your expenses increase and your net of fees remain the same.”
This is pathetic. First, as Dennak Murphy of the American Federation of Teachers stressed:
[C]osts matter. What is not measured is not managed. While net returns is clearly what matters most, hidden, secret, and need I say embarrassingly high fees should be disclosed.
As we’ve mentioned, the Maryland Policy Institute has determined that public pension funds give up billions of dollars, or what they estimate as 1.68% in return, by investing in high-fee strategies like private equity.
At a minimum, exposing the total fees that private equity investors pay will put pressure on public pension funds and other private equity investors to crack down on these over-rich fee arrangements, which will provide them more in net returns, contrary to Findlay’s bland claim to the effect that providing more transparency would leave the status quo unchanged.
Second, and as important, Findlay conveniently ignores the issue of abuses and scamming, which more comprehensive disclosure would curtail.
So while these endorsements of more disclosure are a positive sign, it’s key to remember that the incentives of most officials are to engage in lip service and gestures rather than bona fide reforms. That’s why John Chiang calling for a more comprehensive approach sets a standard by which other efforts can and should be measured.
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I’m not familiar with the exact arrangements between the American Federation of Teachers and PE. My guess would be that the AFT can pick up their ball and go home anytime they want.
If that’s true, then it’s not just CalSTRS et. al. who are engaging in lip service. The AFT could always just say, “No, we’re done here until you give us better answers.” Then stuff would change rapidly.
The point is this: While the various LPs are certainly dragging their feet and hoping everything will just go away, if the AFT can walk at a time of its choosing, but elects not to, then they’re guilty of the same obfuscation — but they’re just hiding it better.
I would add a concern Yves has always mentioned regarding Public Pension investments in Private Equity not being allowed to be used for any purpose that undermines goals, aspirations, and other social justice concerns unions and their public employees support.
This is the heart of the matter, isn’t it?
Staff and politicians can point to “net” returns all day long. The real problem here has always been that PE players like Carlyle and Blackstone are looting the world economy and putting hundreds of thousands of Americans out of work, and that they have been using the pension savings of public sector employees as their working capital to accomplish this theft.
A portion of the proceeds of this looting and the unconscionable fees being charged to generate “net returns” are being recycled as political “Dark Money” donations and as monopoly news media ownership, making sure that no difficult questions get asked. The vandals’ answer to the social unrest caused by the displacement of the American Working Class (euphemism: “Middle Class”)? Mass incarceration of petty offenders (in PE-owned private prisons), while elite fraud goes unpunished.
Good to read this reporting.
Very glad to read Missouri state treasurer Clint Zweifel is taking action. Common sense says you have to count all the costs to know what return you’re earning.
Missouri MOSERS pension director Mr. Findlay’s head in sand approach is out of keeping with the famed Missouri – “the show me state” – common sense and shrewdness.
Thanks again for these posts.
“I come from a state that raises corn and cotton and cockleburs and Democrats, and frothy eloquence neither convinces nor satisfies me. I am from Missouri. You have got to show me.”
– 1899, Missouri Sen. W.D.Vandiver
Frothy eloquence from the PE general partners is enough to convince Mr. Findlay?
Any thoughts on RI’s initiative in this regard? The Treasurer there is still refusing to release existing contracts with private equity firms, the deals which his predecessor, Gina Raimondo, also refused to make available.
http://www.pionline.com/article/20150629/PRINT/306299974/rhode-island-takes-transparency-to-new-level
Some progress… I think Chiang truly wants to do what is best for California as a whole. Have met him once or twice & he seems like a smart nerdy get the job done right guy.
“The thing I hope people understand is that our activity is net of fees,” said Gary Findlay, MOSERS executive director, in a telephone interview, “so essentially what’s happening is, if you better identify the additional fees beyond what we’re able to capture, all it means is your gross return increases and your expenses increase and your net of fees remain the same.”
I had to look up “net of fees.” But I’m still not quite sure what he means. Why does he mean by, “…all it means is your gross return increases and your expenses increase and your net of fees remain the same.”
It struck me as meaning something like a jaundiced “we’re gonna pocket that money anyway” — Am I grokking?
@Rhondda – I think you grok about right. Net of fees is basically the gross total return minus the fees. Try this: The pension reports a net of fees return of $1,000,000 derived from a gross return of $1,500,000 with $500,000 of fees deducted. Findlay is saying that if you find another $250,000 of fees, then the pension would report the same net of $1,000,000 but this time derived from a gross return of $1,750,000 and fees of $750,000.
As Yves says, this assumes that additional disclosure will not motivate any changes in the fee structures. In other words, Findlay doesn’t care how much of the pension’s money the PE firm keeps for itself, as long as the fund gets the net return it wants. Of course, as Yves and others have so amply demonstrated those net returns are pitiful, especially in light of the illiquidity and risk of PE investments.
My hope is that some serious transparency would motivate pension plan participants and beneficiaries to start pressuring the pension managers to stop wasting so much money paying PE managers enormous fees for those pitiful returns.
I think what it means (someone correct me if I wrong) is:
Findlay doesn’t know what he’s talking about. He seems to be saying is “we’d take home the same amount, after all fee deductions, using either accounting method. Calculate the total return before deductions as larger and calculated total fee deductions as larger and the final result (total minus the fees) will be the same. So accounting method is a non-issue.” Well, MOSERS might ‘take home’ the same amount, but would PE still look like a good deal if properly accounted?
As Yves notes in the post:
This is pathetic. First, as Dennak Murphy of the American Federation of Teachers stressed:
” [C]osts matter. What is not measured is not managed. While net returns is clearly what matters most, hidden, secret, and need I say embarrassingly high fees should be disclosed.”
As we’ve mentioned, the Maryland Policy Institute has determined that public pension funds give up billions of dollars, or what they estimate as 1.68% in return, by investing in high-fee strategies like private equity.
So Findlay has no idea what the actual total fees MOSERS is paying PE and therefore has no idea what return he’s getting for the high risk he’s taking by investing in PE; has no idea if it’s a good investment or not. So, say his MOSERS ‘take home pay’ from PE investment is $10 no matter how it’s accounted for. The $ number is less important that the % number. Does $10 mean a 6% return on risky investment, or does it represent a 2% return on a risky investment. Findlay has no idea. He might get that hypothetical 2% in much safer and more liquid investments with far lower costs to the pension fund.
Thank you both for the edumucation. The more I learn about this subject, the more I ask myself Why public pensions (especially) would tango with Pirate Equity. It must be The Corruption. Because the fees, risks, etc seem to make it clear that it’s not wise investment practice. I’ll bet there’s a lot of participators who justify it as go-along-to-get-along, or networking-for-success — or whatever construct salves. Huh.