CalPERS’ carry: Asian lawyers see a storm in a teacup

Private equity lawyers based in Asia tell Private Equity International that CalPERS’ disclosure of its carried interest data should be viewed from the perspective of returns.

The carried interest figures reported by the California Public Employees’ Retirement System (CalPERS) last week are justified by returns and criticism related to the disclosure is mostly just a “little bit of a storm in a teacup”, private equity lawyers in Asia told Private Equity International.

CalPERS revealed on 24 November, that since the inception of its private equity programme in 1990 it has paid its general partners a total of $3.4 billion in carried interest, and realised $24.2 billion in net gains from its active funds, as reported by PEI.

The US pension scheme has been subject to intense public criticism for its apparent inability to track fees. In response, CalPERS launched its Private Equity Accounting and Reporting Solution in October, which it began developing in 2011.

One PE lawyer in Asia said that “there will undoubtedly be many in the ‘anti-private equity’ crowd who will point to the large headline sum that CalPERS has paid out, but thoughtful analysis will, I hope, demonstrate that large carry payments are simply evidence that CalPERS has allocated their capital to the asset class well. Indeed the numbers back that up with CalPERS’ net returns for PE far exceeding their other asset classes over the past 20 years.”

He said that based on CalPERS’ numbers there are strong grounds to show that the high performance fees paid in the industry are justified. “Would you rather have 12 percent plus net [CalPERS private equity returns] with high fees or 8 percent plus net [their public equities returns] with no fees? The answer is pretty obvious.”

A second lawyer, who is active in Asian fundraising, said: “The leading general partners in Asia are widely supportive of transparency and full disclosure, and they certainly believe their fees and carry are appropriate in light of their investment performance.

At the same time, they want to ensure that any granular discussion of fees and carry are coupled with a discussion of the corresponding strong investment performance. CalPERS has rightly been careful to make sure these discussions go hand in hand, but one has to ensure that the fees and carry are not discussed on a misleading standalone basis.”

A third lawyer, who specialises in private equity transactions and mergers and acquisitions in Asia said: “It’s not like disclosure of fees is something that’s scandalous. These are legitimate fees being charged for investment of funds and charged on a model of fees and fee structure that are very well known in the industry. It’s been brought up to look bad because CalPERS has aggregated total fees paid over a period of more than 25 years. When you actually look at the returns generated, this is an asset class that probably generated better returns than most of CalPERS’ investments in public funds.”

CalPERS’ disclosure is considered a landmark because of the system’s size and influence. The first lawyer said he expected other US funds to follow suit. “When CalPERS first started publishing fund performance, opinion was divided; better performing GPs were ecstatic and the poor performers somewhat embarrassed. But other US public pension plans followed CalPERS’ lead and the publication of this sort of information has become somewhat the norm over the years and an accepted cost of taking money from these investors. CalPERS is undoubtedly a trendsetter and I would similarly expect other plans to follow suit in terms of publishing carry figures,” he said.

The same lawyer added some Asian GPs may use public disclosure of carry as a reason – along with a number of existing regulatory burdens – to shy away from US plans. However, these GPs raising money from the likes of CalPERS are likely to be the better performing managers and will therefore have little to fear from publication. “From an Asian LP perspective, where there is much less transparency than in the US, there is unlikely to be a rush for local pension plans to publish this sort of information.”