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CMERS calls for fee transparency

CMERS CIO David Silber outlines a range of concerns from industry fees to disclosure practices.

City of  Milwaukee Employes' Retirement System (CMERS) chief investment officer David Silber has taken private equity fund managers to task over their lack of transparency concerning fee and disclosure practices.

In an open letter published by Pensions & Investments on Monday, the CMERS CIO wrote that the municipal pension plan is “troubled by the lack of transparency” that is provided to limited partners on issues including fees, internal controls and subscription documents.

Silber said it's time for general partners to stop claiming that fees, expenses, internal controls and subscription documents are confidential information. Moreover, he noted that the unstated fees some buyout executives impose, such as transaction or monitoring fees that are levied on portfolio companies following an acquisition or financing arrangement, as well as consulting, and other types of fees are even more “concerning”.

Silber did not return calls to Private Equity International for additional comment by press time.

The CIO also alluded to the costs associated with annual management fees derived by general partners on the limited partnership funds they manage, noting that the “stated fees on private equity vehicles are lucrative to begin with.”

The CIO of the $4.4 billion municipal retirement system stated in no uncertain terms that the factors that make private equity as an asset class attractive to pension plans have nothing to do with “confidential terms.”

Silber also took issue with keeping limited partnership agreements and side letters confidential, which provides GPs with a supposed competitive edge. “CMERS officials have never heard a manager attribute its top-quartile returns to its fee schedule, allocation of expenses, internal controls or obfuscating legal documents.”

Silber was appointed to CIO of CMERS in 2013 after serving as interim CIO following the death of former CIO, Thomas Rick.

The letter by the CMERS CIO comes at a time when the fee practices of general partners and the profits they derive from realisations have come under heightened scrutiny across the institutional investment community and from regulators. For its part, the Securities & Exchange Commission is reviewing fee disclosure practices and has stated it will pursue enforcement actions.

One GP that found itself the target of SEC action this year was New York's Patriarch Partners, a firm and its affiliate Zohar funds which the regulator claimed breached fiduciary duties in an enforcement announcement in March.

The SEC stated in a press announcement that Patriarch and its fund managers had preserved management fees by failing to disclose asset values connected to three collateralised loan obligation funds from investors.

Meanwhile, the $303 billion California Public Employees Retirement System (CalPERS) recently requested all its current GPs provide it with information on partner-level carried interest deducted from gross returns since inception.

Ninety four percent of CalPERS GPs have provided the fund with carried interest information and in the autumn, the fund will begin publishing the data for the fiscal year that ends in June. The California pension system moved to reduce the fees it is paying to private equity sponsors last month with its decision to cull its total number of fund managers by half.

Silber noted that it's only natural for investors to raise questions about undisclosed fees, compensation, the alignment of interests with investors' objectives and whether there are enough internal controls to minimize the damage that could be caused by an employee committing fraud.

The lack of transparency damages the private equity industry and generates “negative headlines, according to Silber.

“The failure of private equity managers to adequately address these issues leaves a vacuum that will likely be filled by additional public scrutiny, continued frustration from the investment community, and increased attention from regulators and tax authorities,” he said.