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CalPERS Reviews How It Invests in Private Equity

The review stems from efforts to cut fund administration costs, particularly those tied to rising private equity fees.

  • Alicia McElhaney

Just days after announcing that it planned to restructure its investment portfolio’s segments, officials from the California Public Employees’ System have confirmed that the fund is reviewing how it invests in private equity.

The review stems from efforts on the part of CalPERS, the largest pension fund in the U.S., to cut fund administration costs, particularly those tied to rising private equity fees. “We are exploring a number of options and no conclusions have been made,” Megan White, an information officer at CalPERS, said in an email. “We plan to discuss the review with our board over the summer.”

The Wall Street Journal first reported the review by CalPERS on Sunday, April 16, noting the $315 billion pension plan could be looking at buying a private equity firm, creating a separate company outside of CalPERS to make private equity investments or asking its staff to make such investments directly. While White declined to comment on whether CalPERS is exploring any of these options, the pension plan proposed in a presentation Monday that it could take an “active, value added” approach to private equity investing.

CalPERS aims to invest 8 percent of its portfolio in private equity, already reduced from its previous 10 percent allocation target, according to the Wall Street Journal report, which said the fund had about $25.7 billion invested in the asset class in January.

CalPERS may be shifting away from the traditional style of investing in private equity as more attention is being paid to fees pension plans pay for alternative investments. Last week, Pew Charitable Trusts issued a report that pension funds may be paying private equity firms more than $4 billion a year in unreported fees, or as much as 1.5 percent of assets. The undisclosed fees include carried interest, monitoring costs and portfolio company fees, and contribute to the hurdles CalPERS and other pension funds must jump before reaching profitability.

While CalPERS’ private equity investments have outperformed other segments of its portfolio, the fund noted in November that it currently doesn’t have the assets on hand to pay all future obligations, so it will be looking to cut costs in any way it can. Several major funds have already adopted practices to make fees more transparent, including the California pension plan, which in 2015 said it would begin reporting total carried interest paid to private equity.

Costs aren’t fully transparent partly because some plans don’t consider carried interest – the 20 percent profit cut taken by private equity firms – as an investment fee, according to the Pew report. “Opaque reporting” by private equity managers also leads pension funds to view carried interest as a non-separable expense that doesn’t have to be reported as an investment cost according to accounting standards, Pew said in the report. In 2014, CalPERS eliminated its $4 billion hedge fund investment program, citing high costs, Pew noted.

CalPERS is holding board meetings April 17 - 19 to discuss changes to the way the fund reports its investments, including a proposal to combine private equity and global equity. The merged segments would make up about 54 percent of CalPERS total investments. Some of its peers, including Ontario Teachers’ Pension Plan, the Canada Pension Plan Investment Board and the New Zealand Superannuation Fund, already combine public and private equity when reporting results.