Snapshot: South Carolina Retirement System talks fees

SCRS director of operations and operational due diligence Andrew Chernick and executive director Michael Hitchcock tell Private Equity International that the system had the data points to hand for its performance benchmarking exercise, but that is not the norm.

Q. How did you obtain data from your GPs for your fee reporting?

A.AC – We put a lot of staff and resources into this initiative. To capture the data requires additional requests and work. You just have to hold your manager accountable to give you the data. When CEM Benchmarking did an analysis on our performance and carried interest, they were astounded because we actually had the data points and that’s not the norm.

MH – On fees, it’s about taking the time to collect and capture all that data. We get that information from managers and make a significant effort to do that. It’s about standardising that collection process to make it repeatable for us year on year and really putting the focus on getting and understanding the underlying data from managers

Q. How did you utilise the data you collected from GPs? 

A.AC – All of the returns we get from the managers are net of fees. Fees don’t necessarily help you understand what your returns are, but rather let you have a much better understanding of the economics of the industry.

If you had the size and scale, you can negotiate better [with knowledge of fees]. The end result is something the industry needs to know and understand: What is the overall economic impact of the fees we’re paying?

MH – The more scale you have, the more you can leverage the fund managers to give the numbers to you and the forms you’re requesting. If we know how much we’re paying in fees, like anything else, it gives us a tool to potentially negotiate, which could improve the overall return for the asset class. From that standpoint, it’s beneficial for us to gain that level of understanding.

Q. What do you think about other LPs who don’t request the data or think carried interest is irrelevant?

A.AC – I can understand if someone’s satisfied with their returns on investment. I can understand they don’t care as much about fees they’re paying. But that’s not the path we’re going. Other pension funds have contacted us on how to report fees. A lot of pension funds have to realise, if you request it, you’ll get it. It is a lot of work.

Smaller pension funds would have a hard time collecting fee information. If they run with one or two people, this would be a huge burden on them. But if GPs adopted the ILPA [Institutional Limited Partners Association] template, it would make everyone’s lives easier.

Q. How has demanding for fee transparency affected you?

A.AC – We’re more aware of total fees and total fee structure. It’s helped us increase our initial due diligence. Once you’re in these structures, you’re locked in. So the time to tackle these fees is upfront to make sure our commissioners and investment staff are aware of them before making long-term commitments.

MH – It’s also to the benefit of our beneficiaries. Whether that’s through the ability to understand fees, achieve better returns or reduce ancillary costs, it certainly comes down to the fiduciary responsibility. Hopefully [the industry] will move towards standardisation of what’s requested and reported by GPs. The farther that moves along, the happier we will be.