The nation’s largest pension fund by assets said it has paid $3.4 billion in performance fees to private equity managers since 1990, providing the most significant disclosure yet in a debate at retirement plans over whether Wall Street is worth the price of admission.
The California Public Employees’ Retirement System, known as Calpers, disclosed the performance-related expenses for the first time Tuesday. Calpers said those performance fees were based on profits of $24.2 billion earned in hundreds of private equity funds over the past 17 years.
“We have been rewarded for the risk we took in the [private equity] programme, and the costs we incurred,” said Ted Eliopoulos, Calpers’ investment chief, in a conference call with reporters.
Faced with mounting retirement obligations and rocky performance, pension funds across the country are evaluating their bets in the private equity, hedge fund and real estate sectors.
Lawmakers and pension trustees have been scrutinising performance fees, the biggest source of profits for outside money managers, because they are an expense that has rarely been made public. In recent months, officials who oversee retirements for government workers from New York to California have begun to tally up the bill. Pension funds in New Mexico, South Carolina, Kentucky and New Jersey previously disclosed total costs were as much as 100% higher than they originally reported.
The Sacramento, California.-based Calpers has $28.7 billion, or about 10% of its $295 billion portfolio, invested with private equity firms. Calpers has investments with more than 700 private equity funds and works with some of the biggest names in the industry, including Blackstone Group and Carlyle Group.
Some pension officials and fee specialists said they were surprised by the $3.4 billion performance fee total. “I’d have thought the number would be higher,” said Bob Maynard, chief investment officer of the Public Employee Retirement System of Idaho, who spoke last week at a private equity workshop hosted by Calpers.
Private equity firms buy companies using money from pension funds and other investors, hoping to earn more in a sale or public offering later on. They typically charge clients a management fee of 1% to 2% of assets and a performance fee of as much as 20% of the gains when they sell companies for a profit.
Private equity firms said they have long provided pension funds with requisite information about their costs and share of any profits.
A high performance fee means private equity firms have produced big profits for their investors, said James Maloney, a spokesman for the Private Equity Growth Capital Council, a Washington trade group. The Calpers performance payout figure “shows the success of its private equity programme and is excellent news for California’s public employees, pensioners and the state budget,” he said.
U.S. public pension funds collectively have become the largest investors in private equity, with more than $350 billion committed worldwide, according to Preqin, which tracks such investments.
Private equity is Calpers’ top performing asset, producing returns of 12% over the past decade, the pension fund said. Still, Calpers is looking to reduce the number of ties it has with private equity firms, making larger commitments to a smaller number of money managers. Calpers said in June that it wanted to slim down its private equity managers by 2020 to about 30 firms from roughly 100.
Apollo Global Management accounted for more than one fifth of the total performance payouts, with $732.8 million, according to Calpers. Carlyle collected $432.5 million, while Blackstone had $159.6 million.
Calpers previously only reported management fees paid to private equity managers. That figure for fiscal 2015 ended June 30 was $414 million, Calpers said. Private equity produced profits of $4.1 billion and performance payouts totaled $700 million in fiscal 2015, Calpers said. That means the retirement system’s total private-equity costs that year were more than $1.1 billion.
Private equity expenses have had a sizable effect on Calpers’ total returns.
Without fees or other costs, the plan’s private equity returns were 19% over the past 20 years, according to a Calpers report presented at a board meeting last week. But after factoring in the cut kept by private-equity firms, those returns fell to 12%, Calpers said.
Private equity performance has also fallen below Calpers’ own internal benchmarks over one, three, five- and 10-year time frames, according to Calpers documents.
California State Treasurer John Chiang, a Calpers board member, said the Tuesday disclosure is “a meaningful first step in removing the shroud of secrecy over an investment class which is both controversial and vital to our investment strategy.” But “too much compensation information remains missing,” he added.
Calpers’ disclosure could mean other pension funds feel pressure to report performance payouts, said Lorelei Graye, who consults pensions on fee disclosures and spearheaded a similar cost analysis at a South Carolina retirement plan.
