Private Equity’s Other Transparency Problem

Proponents of transparency face new challenges as some investors grapple with the problem of too much disclosure.


This month , at an off-site meeting at a Monterey Beach hotel, the California Public Employees’ Retirement System will weigh the future of its private equity portfolio.

The program has been a thorn in the investment office’s side for two years now. CIO Ted Eliopoulos has warned that it may be necessary to scale back CalPERS’s private equity allocation if a solution cannot be found.

The problem is not subpar performance: At the fund’s June investment committee meeting, Eliopoulos cited the asset class as one of the fund’s best sources of return in an otherwise lackluster environment. The problem is transparency — or rather, the very large spotlight CalPERS has found itself under as a result of improved transparency within its private equity program.

“The particular public nature and fishbowl of CalPERS may have reached a tipping point for us in private equity,” Eliopoulos said.

Improving transparency within private equity investing has been a focus of lawmakers and investors like CalPERS for several years, as limited partners have sought better alignment of interests with these firms and regulators have worked to protect the retirees and other beneficiaries ultimately on the hook for the investments.

Under the leadership of former chair Mary Jo White and former enforcement director Andrew Ceresney, the U.S. Securities and Exchange Commission made an example out of a number of the industry’s biggest players, including fining Blackstone Group and KKR & Co. in late 2015 a combined $69 million for charges related to improper fee disclosures. Meanwhile, states including Illinois and Washington drafted legislation to strengthen reporting requirements on alternatives for state and local pension funds.

With the law firmly on the side of transparency, investors and, to a lesser extent, private equity firms rapidly adopted fee reporting templates like the one released by the Institutional Limited Partners Association in early 2016. In the year and a half of its existence, ILPA’s version has been publicly endorsed by more than 100 organizations, Blackstone and KKR among them.

Despite the progress that’s been made on the transparency front, industry experts say there’s still plenty of work to be done — even as the investors that had crusaded for transparency come to terms with the new challenges that have accompanied it.

ILPA, for its part, has continued the charge, most recently turning its attention to the subscription lines of credit employed by private equity firms to bolster internal rates of return. But it’s unknown if White’s and Ceresney’s successors at the SEC — chair Jay Clayton and enforcement co-directors Stephanie Avakian and Steven Peikin — will continue down the path of regulating the still fairly opaque private equity industry.

This month, a small number of limited partners — CalPERS among them — will sit down with the new SEC chair in a meeting organized by ILPA to discuss private equity regulation under the new regime. Still, the regulatory future remains unclear — and with increasing amounts of cash flooding into an asset class that is already bursting at the seams, the balance of power may be quietly shifting back to the general partners.

“Given the hot fundraising market of the last few years, GPs have been able to work with a smaller number of prospective LPs to raise capital and have had more power to push back on some marginal requests,” says Tom Cawkwell, head of private markets at alternatives consulting firm Albourne Partners.

So far his firm has not seen any “meaningful reduction” in access to relevant data like investment-performance metrics for “serious prospective investors,” Cawkwell says. “GPs are proud of what they have achieved, and underlying investment operating data can be very helpful in showing, for example, how the GP made meaningful and replicable improvements in the portfolio company despite a negative sector trend or currency movement.”

But while GPs may be happy to show off their underlying data to investors, this willingness to disclose investment information does not necessarily extend to the general public. Richard Carson, senior director of private investments at Cambridge Associates, says there is a huge difference between transparency within an investment partnership and transparency in the form of making proprietary investment data available to anyone with internet access or the ability to file a Freedom of Information Act request.

“The public disclosure of information — that for sure can be an issue that could potentially keep a GP from admitting certain LPs as investors,” he says.

This level of transparency — typically found only at public defined-benefit funds subject to disclosure laws — can be detrimental to LPs, who may find themselves locked out of attractive investment opportunities.

And other drawbacks have come with more transparency. At CalPERS’s investment committee meeting in June, Eliopoulos expressed concern that the spotlight trained on the fund’s private equity investments may have diminished its ability to compete as an investor.

CalPERS has been, in Eliopoulos’ words, an “industry leader in how we report private equity returns, fees, and expenses . . . in working with our peers and importantly the ILPA to work for standardization and make consistent fee and expense disclosure globally.”

Publicly reporting private equity fees and expenses has come with an unfortunate side effect, however: making the public aware of exactly how much CalPERS is paying in private equity fees and expenses.

The resulting onslaught of criticism from the media and plan beneficiaries over the last two years has not only served as a harmful distraction for the fund’s investment and operations staff, but has actually damaged CalPERS’s reputation as a private equity LP, Eliopoulos said.

“Part of the price of our value of transparency and our role as a public agency is to take all the good and bad that comes with transparency, all the good and bad that comes with public comment and public attention,” he said. “But this sustained and repetitive attention on our staff and our private equity strategy is taking a toll on both our staff and our competitiveness in the marketplace.”

California’s other state pension, the California State Teachers’ Retirement System, has similarly warned of the pitfalls that can come with too much transparency. Last year, when the state legislature sought to pass a bill that would have demanded stringent disclosure on alternative investments — including releasing proprietary fund information at the portfolio company level — CalSTRS was among the funds to protest the proposed requirements, arguing that private equity firms would no longer wish to partner with California’s public pensions. The resulting law, which went into effect this year, was significantly watered down to accommodate these concerns.

“We feel the impact of transparency in our relative competitive position with other investors when it comes to potentially lucrative partnerships, but we understand the need for this transparency with a state-supported entity like CalSTRS,” CIO Christopher Ailman said in a statement provided to Institutional Investor. “In the larger scheme of things, this is just one more condition of working with a public pension investor and we’ve encountered a good deal of cooperative spirit from our general partners.”

Cawkwell — who managed a private equity portfolio at CalSTRS before joining Albourne in 2007 — similarly notes that there has been a “good level of GP transparency to LPs in their funds.” And at Cambridge Associates, Carson says, the primary hurdle for widespread adoption of more detailed reporting practices among GPs is not a reluctance to disclose information but simply a lack of resources at smaller firms. Ultimately, however, he says it will be more efficient in the long run for GPs to adapt their reporting processes, as large, sophisticated investors are only becoming hungrier for “deeper and broader” information — information that could only improve investment partnerships between LPs and GPs, he notes.

“We’ve assumed a leadership position in developing a reporting structure that offers a greater level of openness than ever before in the industry while protecting our interests as a private equity investor,” Ailman said. “After all, we’re in this space to maximize the return potential of the fund for the benefit of our member-educators and their beneficiaries.”