Land of the fee

Ever since the California Public Employees' Retirement System admitted in April 2015 that it didn't know how much carried interest it paid to its private equity managers, the issue has been on the minds of the industry – and the public.

State legislatures from coast to coast have seen proposals on pension systems' reporting mandates brought to their floors.

The most recent bill to pass is the Assembly Bill 2833 Public Retirement Alternative Investments Disclosure in California, which requires public pension systems to obtain specific disclosures from their fund managers “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.

While pension plans are generally in favour of more transparency in the reporting of private equity fees and expenses, they also fear the new rules could increase costs and prompt some fund managers to avoid raising capital from LPs subject to these state laws.

The board of the Los Angeles City Employees' Retirement System opposed AB-2833, saying the potential exclusion by fund managers may hurt LPs' investment performances, especially when “private equity investments have comparatively been a consistently well-returning asset class”.

But Washington State has taken a different tack. In June 2015, it passed a bill exempting city retirement systems from disclosing certain information about private fund investments if disclosure could result in potential losses. 

Phill Tencick, executive director at the Spokane Employees' Retirement System, tells PEI this bill, which brings cities into alignment with exemptions already in place for Washington State Investment Board and the University of Washington system, provides better access to managers and enhanced due diligence. So states are divided on whether more or less disclosure is best for their retirees. The clash also comes as Institutional Limited Partners Association attempts to standardise disclosure methods across the industry, by releasing its fee-reporting template.

“Implementation of any new set of standards requires time,” says ILPA managing director of industry affairs Jennifer Choi. “It would be a shame to pre-empt the progression that's underway towards more uniform reporting with a tangle of differentiated local-level requirements.

“Crafting a legislative solution to reporting is inherently challenging. It's difficult to reflect in law the realities of a dynamic and diverse industry, as opposed to recommendations driven by an industry- and practitioner-led process and that can be updated at reasonable intervals.”

So far, private fund investment disclosure-related bills have passed in California and Washington, failed in Alabama, Kentucky and New Jersey, and are pending in Illinois, Louisiana and Rhode Island. As the desire for transparency escalates, similar bills may appear in other states. But it's not clear they're really needed.

I do not think [these bills are] necessary as public plans are feeling the pressure in a low-return, high-fee environment,” one American LP says. “We are making the necessary changes and have been disclosing fees to the legislature for several years without the need for legislation.”