California Pensions to Say More on Fees, but Critics Persist

  • Governor Jerry Brown signs measure requiring more disclosure
  • Largest two public pensions fended off calls to go further

California Governor Jerry Brown signed legislation requiring public pension funds to disclose more about the fees that private equity firms charge to manage the funds’ money.

State officials hailed the law, approved by the governor on Wednesday, as an advance in transparency. The public will now know not only how much big pension funds like the California Public Employees’ Retirement System and California State Teachers’ Retirement System are paying private equity firms to manage their investments, but also learn more about how much they’re paying for performance. The public will also get a partial look at the fees private equity firms collect from the companies they buy out.

“California taxpayers and pension beneficiaries will now get to go behind the curtain to view the previously hidden fees and charges paid to Wall Street firms,” the state’s treasurer, John Chiang, who sits on the boards of Calpers and Calstrs, said in a written statement. He said the law would create the “nation’s most robust transparency requirements” concerning investments in the buyout funds.

But critics say the law won’t provide a complete enough picture of how private equity firms charge for their services.

PE Fees

Private equity firms collect management and performance fees from investors. They also charge companies in their portfolios for services like consulting. Under the new law, California investors will learn what portion of these fees portfolio companies are paying on the pension funds’ behalf, but they won’t necessarily learn how much the private equity firms are charging the portfolio companies in total. 

Without that information, some critics say, there’s no way to measure the full financial impact on the portfolio companies of the fees they pay to private equity fund managers. An early draft of the law would have required such a disclosure.

“The law is a big disappointment relative to what was possible in terms of transparency improvements,” said Michael Flaherman, a former member of the Calpers board who consulted with the legislation’s backers early on. Flaherman withdrew his support for the bill after it was amended.

State and local pension officials across the country have invested $420 billion in private equity, but in many cases they are required by industry contracts to keep details of fees secret from the public and sometimes even their own boards. The U.S. Securities and Exchange Commission reported in 2014 that such firms frequently charged excessive and undisclosed fees.

Seven States

Legislation requiring more disclosure was introduced in at least seven states this year, but with Brown’s signature, California became the only one to enact it into law. In many cases public pensions have lobbied against the legislation because of concerns that disclosure might alienate private equity managers and lock the pension funds out of potentially lucrative investments that they say they need to fill a $1.8 trillion gap in needed funding for benefits.

For more on public pensions’ opposition to more disclosure, click here.

That was the case in California, where the staffs of Calpers and Calstrs, the nation’s biggest public pensions, backed amendments to curtail the amount of information their private equity managers would be required to disclose about their fees and expenses.

Fee Structure

Firms often charge investors fees of 1 percent to 2 percent, plus 20 percent of profits, though they sometimes add other charges, as well. The all-in cost can run upwards of 3 percent, 100 times what an institution might pay to invest in an index fund. The pensions sign contracts that keep most of the numbers hidden from outsiders.

James Maloney, vice president for public affairs at the American Investment Council in Washington, didn’t respond to a phone message. The council represents private equity firms.

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