Levine on Wall Street: Secret Fees and Pimco Flows

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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KKR doesn't want anyone to know its fees.

Private equity firms invest a lot of public pension money. Public pension funds are government-ish entities and so tend to be subject to freedom-of-information laws. Private equity funds have some history of charging weird squirrelly fees. So enterprising reporters went and asked, for instance, the Iowa Public Employees' Retirement System to disclose the details of its fee arrangements with KKR & Co. And KKR responded with a heavily redacted fee disclosure -- with all the actual fee disclosure blacked out -- and a claim that this was necessary for competitive purposes:

Buyout firms contend it is crucial to keep much information secret for competitive reasons. Disclosing certain data “could undermine a fund’s ability to invest and generate high returns for its limited partners,” said Steve Judge, chief executive of the Private Equity Growth Capital Council, an industry advocacy group.

This is ... this is not all that plausible, is it? I recommend looking at KKR's redacted document, which blacks out all actual fee amounts, but which also explains the rationale. It's "Iowa Code section 97B.17(2)(e)," which allows non-disclosure "if the disclosure of such information could result in a loss to the retirement system or to the provider of the information" (emphasis added). It is hard to believe that disclosing the fee breakdown between a KKR private equity fund and its managers could actually cause competitive harm to KKR portfolio companies, or investing losses to the Iowa retirement system. On the other hand, it's just about conceivable that fee transparency by KKR will drive down its fees, as clients and competitors see the fees and respond to them, and that would hurt KKR. Which is a good enough reason to keep it secret under Iowa law, though not an especially sympathetic one. I mean, the point of these public-record requests is pretty much to do just that.

Pimco had some more outflows.

Its Total Return Fund, formerly run by Bill Gross, said goodbye to $27.5 billion in October, and $23.5 billion in September, and Pimco helpfully published a graph showing that the activity was concentrated around Gross's departure and is now back down to a few hundred million dollars a day. It ticked up a bit after Pimco rehired the croque-monsieur guy, though generally you'd think that Pimco's ability to bring back all of the star bond investors whom Bill Gross chased away would be positive for the firm. Meanwhile "Total Return isn’t increasing cash-like holdings in the fund to meet redemptions," and it is interesting to think about how you'd manage your liquidity position to meet redemptions of like a quarter of your fund over a few days. One possible answer would be decreasing liquid holdings -- that is, sell the most liquid stuff first, and then work into your desired overall position over time -- but, y'know, perhaps everything is equally liquid and there is no reason to discuss any of this. "It’s business as usual," says Total Return manager Scott Mather, though I don't know if that means they're back to not making eye contact.

Elsewhere in liquidity.

Here is the story of an Invesco exchange-traded fund that invests in leveraged loans, which worries people who worry about ETFs disguising liquidity risks in credit markets. The idea is that ETF investors expect to be able to get instant liquidity, and if they are all sellers at once, the ETFs will have a hard time selling the underlying assets to meet investors' liquidity demands. The fact that investors have withdrawn a lot of money from this Invesco ETF over the last three months, with no obvious ill effects, is I guess a good sign though? And regulators are still trying to crack down on leveraged loans, which is conceptually puzzling -- "Why would you mess with something that has worked pretty well for borrowers?," says a guy for whom it has also worked pretty well -- and seems pretty ineffectual? I feel like I keep reading articles about how regulators are mad about all the leveraged loans that get made, and announcing new plans to cut down on them. But then the articles keep coming. Elsewhere, here is a story about Uber and subprime auto finance.

The revolving door for analysts.

Sometimes sell-side equity research analysts leave to go work for the companies they cover, much as regulators sometimes leave to go work for the companies they regulate. Here is a paper, by Ben Lourie of UCLA, finding that in the year before leaving for covered companies issue more reports on those companies than they did previously, and "alter their forecasts, target prices and recommendations in a direction which suggests that they are attempting to gain favor with their would-be employers." There are plausible innocent explanations -- maybe analysts just go work for companies that they really like? -- but it is suggestive. As with the regulatory revolving door, you could in the abstract imagine alternate mechanisms, including one where companies hire their most critical analysts in order to shut them up, but that now seems less likely as a general rule.

McKinsey has some ideas for the Bank of England.

I guess I'd be annoyed if I hired fancy consultants to figure out how to improve my organization, and they went off and did their work and then came back to me and said "umm your employees want to get paid more." Does anyone not? But McKinsey also found some other troubles at the Bank of England, including "a need to become more nimble and agile as an organization" and for a "more open, transparent and consultative style of leadership receptive to challenge." It is all fairly consistent with Carmen Segarra's picture of the New York Fed as slow-moving and hierarchical, and it's perhaps interesting that the Prudential Regulatory Authority -- the part of the BOE responsible for regulating banks -- "gave the lowest approval rating to management." There's a natural desire for bank regulators to be more like bankers in certain ways -- financially savvy, action-oriented, fast-moving, un-deferential -- but that runs up against the natural problem that regulators are regulators and bankers are bankers. You can tinker with incentives, but it just sort of makes sense that the business of finding new ways to make money will reward and attract nimbleness, and the business of slowing down risk-takers will not.

Things happen.

A profile of Bob Mercer, who co-runs Renaissance Technologies and didn't take a business trip for 21 years, which sounds great. AIG in Hindsight. Leo Strine's advice for deal advisers. The IRR of "No." When Stock Buybacks Are Not a Waste of Money. There's a BATS high-frequency trading settlement coming, which I am very much looking forward to. Ireland is giving companies more intellectual property tax breaks. Morgan Stanley found an extra $1.3 billion of tax assets. Nymex crude is in contango, and oil companies can export U.S. oil without a license through "self-classification." Mathew Martoma will get at least a couple of extra days before he has to go to prison. Connecticut man charged with trying to eat his DWI results. A hipster Starbucks. A hipster-normcore oscillator. Is Capitalism Part of the Answer?

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net