California cost-cutter

CalPERS advances efforts to reduce fees, remove middlemen.

In spring 2009, Joseph Dear, then the newly installed chief investment officer of the $210 billion California Public Employees’ Retirement System, made headlines when he told a conference crowd that LPs must seize current market conditions as a chance to push back on “crummy” terms and secure better alignment of interests.

Dear: fighting 'crummy' fees

“Managers who were automatically oversubscribed and essentially could dictate terms to limited partners are not in the same situation,” he said. “Now is the time for limited partners to take advantage of that and begin conversations about alignment of interests that truly make sense for the long haul.”

CalPERS has certainly not been shy about having those conversations. Dear said at the same conference this year that the pension giant had reached agreements with 50 investment managers to cut a total of $99 million in fees. The fee breaks came from 17 private equity firms, 13 real estate managers, 10 hedge fund managers, 11 global equities managers and two fixed income managers.

One of its biggest coups relates to Apollo Global Management, which agreed to cut $125 million in fees over five years for accounts the firm manages exclusively for CalPERS.

“If you look at the cost of operating a pension fund, the overwhelming majority of our expenses are investment management fees paid to private equity, hedge funds and real estate,” Dear said earlier this year at the Milken Institute’s global conference.

Ares Management is the latest private equity firm to lower fees for CalPERS; it agreed in June to reduce its fees by $10 million over the next five years.

Ares also agreed not to use a placement agent in garnering CalPERS commitments. While Ares in the past seven years says it has only once used a placement agent to interact with CalPERS (for its debut fund in 2003), the agreement underscores another controversial issue CalPERS has thrown its weight behind.

In an effort to curb the use of placement agents and avoid links to any more pay-to-play scandals, the US’ largest public pension said in June it would set up an automated PPM system. The effort, however, has been greeted with scepticism by industry insiders who say it’s simply a repackaging of the current system and will not necessarily prevent future scandals, nor replace the services of some legitimate placement agents.

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