California State Treasurer John Chiang has waded into the fee debate with a strongly-worded letter to CalPERS and CalSTRS investment committees demanding better fee transparency from their general partners.
In a letter addressed to the investment committee chairs Henry Jones of the California Public Employees' Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS) Sharon Hendricks, Chiang called on them to work with his office to develop state legislation to enforce fee disclosure by private equity firms.
Chiang wrote that in the absence of federal rules, state law should require firms to disclose all fees charged to California public pension funds. Disclosure requirements would cover gross management fees, management fee offsets, fund expenses, carried interest and all other fees as well as related party transactions, the letter said.
He urged CalPERS and CalSTRs to work with him to “mop up another private equity industry mess.” The letter noted that the parties had already worked together in 2010 to clean up the pay-to-play placement agent scandals.
Limited partners pay “excessive fees” and do not have sufficient visibility into the nature and the amount of those fees, the letter noted.
Public funds trustees “have a duty to maximise investment returns in order to ensure promised benefits are adequately funded and to minimise tax payer costs,” Chiang wrote. Fees paid to GPs reduce returns and public funds must include PE fees and expenses in their annual reports.
The letter said that “despite positive performance the profit strategies private equity firms employ too often run counter to the values of public fund trustees and their constituents, particularly with respect to the lack of transparency and detail in how much it costs our pension systems to invest in their products.”
Private equity funds have “aggressively courted public pension fund dollars and have profited tremendously”, Chiang wrote, but conceded that public pension funds “have also benefitted from returns that have consistently exceeded projections and outperformed other asset classes.”
He acknowledged work already undertaken by the two funds and the Institutional Limited Partner Association (ILPA) to require GPs to disclose fees, but called for more to be done.
The discussion about fee disclosure has centred around CalPERS and CalSTRS, which have both acknowledged difficulties tracking fees.
Chiang’s letter comes just days after Blackstone Group agreed to pay close to $39 million to settle charges that it failed to fully disclose accelerated monitoring fees for portfolio companies of three funds.
ILPA is developing a standardised template for LPs to track the fees, expenses and carried interest charged, as reported by Private Equity International.