2015.12 Asia Asset Management - CalPERS finally discloses profits and fees on its PE investments

By Paul Mackintosh-Monday, November 30, 2015

I make no apology for revisiting the saga of the California | Public Employees' Retirement System (CalPERS) and its private equity (PE) commitments. After all, everybody else is. Because the pension giant and iconic PE limited partner (LP) has finally disclosed the profits – and fees – on its PE investments. And there couldn't be a more urgent topic for the entire asset class. The Los Angeles Times's headline sums it up succinctly: "CalPERS fee disclosure raises question of whether private equity returns are worth it."

What CalPERS disclosed earlier this week were "US$24.2 billion in realised net gains to the fund from 1990 to June 30, 2015, based on data from its newly operational Private Equity Accounting and Reporting Solution (PEARS)." However, "during that same time period, PEARS data shows that CalPERS' external investment partners have realised $3.4 billion from profit sharing agreements with CalPERS". In fact, some pension sources quoted in the press expressed surprise that CalPERS' fee disclosures weren't even higher.

According to Wall Street Journal calculations, total PE returns of 19.3% for CalPERS over the past 20 years shrink to 12.3% once 7% in fees is deducted, versus 8.2% for public equity. Yes, it's still CalPERS' highest-returning asset class. Look at issues below the headline percentages, such as inherent asset class illiquidity and higher risk levels, and the ratios look even less persuasive. And that's before we even get anywhere near the issue of why LPs should have to pay that 7% in fees at all. CalPERS' own figures give an even lower total net return for its PE programme since inception-just 11.1%. With such less-than-stellar returns, dragged down above all by fee levels, where's the incentive? Or the justification?

If I were a pension fund - or a politician or union official in a state like California – I'd be pushing like crazy to claw back some of that 7%. Or pushing investment committees to steer clear of the asset class entirely. As the iconic Western pension fund investor in PE, CalPERS ought to be doing a better job of advocacy, because its own figures certainly aren't helping, And although there may be no real impetus in Washington to rein in general partners (GPs), politics at state or local level, and the political cost of hard-to-justify investment allocation decisions, may end up doing the job anyway. Some pundits are claiming that the figures provide fresh ammunition for PE's defenders. I don't think so. If I was a firm head in a business less insular and self-regarding than the charmed circle of big buyout GPs, I'd be worried.