Carry data disclosure demand spreads

The Los Angeles County Employees Retirement Association in March became the latest US public pension fund to declare that it would release information on fees paid to GPs, including carry earned by managers. 

The move was in response to AB 2833, a law which requires all California public pension funds to disclose the pro rata share of fees they pay to fund managers.

On the face of it, the bill was a victory for transparency advocates who had long pushed for greater disclosure. For others, it did not go far enough.

“The law is a big disappointment relative to what was possible in terms of transparency improvements,” former CalPERS board member Michael Flaherman said after its passage.

Early drafts required GPs to disclose all fees, including those paid by portfolio companies. This was watered down to require only disclosure of the pro rata share of fees paid by the vehicle through which the pension fund invests.

“If… reduced profitability of the portfolio company as a whole is seen as a 'cost' to investors, disclosing the entire amount would have provided greater insight into the impact of fees on public pension funds,” law firm Ropes & Gray said in its analysis of the legislation.

“The bill wasn't intended to be all things to all people. The goal was to get relevant information to pension funds so that they can understand the fees they are charged and make better decisions about how to invest,” Catherine Skulan, counsel in Ropes & Gray's private investment funds practice, tells Private Equity International . “If you take a broader step back and consider that the law was focused on transparency and disclosure, it does address those aims.” 

Other states including Kentucky, New Jersey and Washington are discussing similar rules. An Illinois bill would require GP disclosure of all fees, including those paid by portfolio companies. In Europe, a number of large pension schemes have been vocal about the need for enhanced private equity fee disclosure. While greater transparency is seen as in the interest of LPs, some question whether it will lead to improved investment decisions – or underlying returns.

“The push by LPs is not a push purely for the sake of transparency, of course,” a large European LP says. “In all industries, it is easier to cut costs than to increase revenues, and it is the same for an LP in private equity. It is easier for the people executing the pension scheme strategy to say to the advisory board 'we were able to cut costs by 50 basis points', because you then have those costs in the hand right now. But it tells you nothing about the net gain achieved through manager selection.”

Some believe that with well-established managers able to raise larger funds quicker than ever, transparency rules may backfire.

“We are in an environment where some GPs can be fickle,” says David Fann, chief executive of advisory firm TorreyCove Capital Partners. “I can envision a scenario in which a hot fund that is well oversubscribed will pick and choose investors based on what public disclosure is likely to be made by the prospective LP.” 

Skulan says the negative impact in terms of access may be greater for smaller public investors in the US. “For smaller states without the amount of public pension money of a larger state such as California, burdensome disclosure laws risk pushing away sponsors who are not willing to address the additional reporting complexity and public disclosure that comes with this type of law.”