The California Public Employees’ Retirement System (CalPERS) is suggesting four changes to a bill proposed in the California legislature in February that suggests mandating all California-based public retirement systems to increase private equity-related fee and expenses disclosure.
Among its provisions, the proposal, known as Assembly Bill 2833 (Cooley) Public Retirement Alternative Investments Disclosure, requires a “public pension or retirement system to require private equity fund managers, partnerships, portfolio companies, and affiliates to make specified disclosures regarding fees and expenses in connection with limited partner agreements on a form prescribed by the system.” That information would then be disclosed at least once a year at a public meeting.
CalPERS, in its agenda for the upcoming 16 May investment committee meeting, outlined four changes it recommends the AB 2833, though it did state that it “strongly supports” the bill in principle. Those changes are necessary to minimise negative effects on the pension system’s operations, to reduce costs and to allow for standardisation in the private equity fund reporting, it said.
CalPERS recommends the bill only apply to new private equity partnerships beginning 1 January 2017, so that it can obtain the general partner’s agreement to adhere to the new disclosure requirements before any requests to amend an existing contract. Otherwise, many of the contracts CalPERS has with GPs are more than 10 years old, near the end of the fund lives, and GP may not be willing to renegotiate the reporting procedures at that point, according to CalPERS.
The GP would have to not only analyse and confirm that it can follow the new rules, but also see if other limited partners will have the chance to adopt the same type of reporting that CalPERS would be treated to. This might lead to a GP being unable or unwilling to agree to the new rules, putting CalPERS in a conflict because the pension does support the transparency goal of the bill.
CalPERS’ second concern is the bill’s lack of a definition of “related parties.” The bill currently says the retirement systems would be required to report fees, expenses and carried interest paid to GPs or related parties, but the term is not specified. To CalPERS, this creates a risk of different LPs or GPs understanding the term differently, and reducing the standardisation effort. This could also be time-consuming for CalPERS’ private equity and legal teams, which would have to spend time and resources reaching a level of agreement with the GPs for consistency.
AB 2833’s requirement to report fees and expenses, and carried interest altogether is CalPERS’ third problem with the bill. Reporting fees and expenses on a fund separately from those costs paid directly by CalPERS, as well as mixing carried interest into certain management fees and expenses, is incongruent to CalPERS’ current reporting procedures, as well as those of “most other institutional investors,” the pension system wrote. As an alternative, it wants the carried interest reporting to be separate from all other expenses.
The last concern CalPERS has with AB 2833 has to do with data calculation. The bill calls for data coming directly from the funds. CalPERS wrote this is a problem because there is no standardisation for funds’ calculations of their data, and that LPs should be allowed to disclose data based on its own calculations, as an option.
If these four changes are not adopted into the proposal, CalPERS said there was a danger it could lose tens or hundreds of millions of dollars in investment returns from being unable to invest with some GPs due to conflicts over contract negotiations.
It said it would also “incur significant costs” related to amending the existing database and fee reporting templates to include carried interest in certain fees and expenses. This puts CalPERS on a “Support if Amended” position for AB 2833, according to the agenda document.