General treasurer of the State of Rhode Island Seth Magaziner talks exclusively to Private Equity International about lobbying the Securities and Exchange Commission to force general partners to be more transparent on fees and expenses. Along with other state treasurers and city officials, Magaziner was one of 13 signatories to a letter sent to SEC chair Mary Jo White on 21 July requesting standardised disclosures from GPs.
Q. How did the coalition letter to the SEC come about?
A. We wanted to contribute to the national conversation on the issue of transparency. There’s been a lot of public dialogue about this issue and as treasurers of pensions we wanted to be part of the discussion. The lack of transparency in fees and expenses gives GPs a lot of leeway in the way they report to their LPs.
For us to report to the public on what each fund manager is charging us actually takes weeks of staff time – the amount of work that we have to do to figure out what we’re being charged is kind of ridiculous.
In May, we announced that we would only invest in funds that would publish their return information quarterly, and fees and expenses annually. In the process of developing that policy we began having internal conversations about how we should determine the amount of fees that we’re being charged by private equity firms and that led to a discussion with other state treasurers.
Q. What was your objective in approaching the SEC?
A. Returns in private equity have been good and there are benefits to limited partners like us on a cash in and cash out basis. But, while private equity is a part of the financial markets, it’s not as regulated as other parts of the financial system.
We would love for the SEC to produce some structured measures for the type of disclosures GPs provide to their LPs on fees and expenses. Fund managers can and should provide clear and complete representations of fees and expenses to limited partners. Managers need to calculate fees when determining their incentive payments. Having general partners provide a clear, standardised accounting of fees to limited partners is less onerous than expecting LPs to engage in cumbersome detective work to figure out how they are being charged.
Q. What are your specific concerns about carried interest reporting?
A. We feel we have an understanding of it [calculating carried interest] but it’s not easy. For example, we know the totals of what we’re being charged all in for expenses and carried interest, but for line item reporting it’s up to us and we have a staff of five full time investment professionals, which is much smaller than some other pension systems.