CalPERS and the hassle of full transparency

California Public Employees’ Retirement System staff fought to diminish the level of disclosure GPs would have had to provide under draft versions of a transparency bill making its way through the state senate.

CalPERS took several critical and groundbreaking steps to be more transparent in its disclosure of private equity data over the last several years. But this recent step was in the wrong direction.

For those of you haven’t followed the ups and downs of AB 2833, early versions of the bill required GPs to provide California public LPs with a comprehensive view into what fees were charged to underlying portfolio companies. After soliciting input from CalPERS staff, as well as the California State Teachers’ Retirement System, AB 2833 authors made several changes to make the legislation more workable.

The most substantive change reduced the amount of information GPs would have had to provide to California LPs. Private equity firms would only share the individual LP’s pro-rata share of those fees, rather than the aggregate. That’s still useful amount of information, but it’s considerably less than what you would need to fully ascertain the fee burden placed on portfolio companies.

PE firms often use several investment vehicles to buy portfolio companies. An LP could know its pro-rata share of fees as an LP in a single fund, but lack of insight into other vehicles would make it impossible to determine the total fees and expenses charged to portfolio companies.

“In a perfect world, we would know the full fee burden. The long-term value of a portfolio company is impacted by the fees. But we view the legislation we’re running this year as an important first step,” said Deputy Treasurer Grant Boyken, who worked on the bill.

Boyken’s right. It is an important first step. What’s unclear is why CalPERS would seek to weaken the bill in this regard.

CalPERS disagrees that its work on AB 2833 diminished its reach: “CalPERS staff did not advocate for less disclosure; in fact staff advocated for broad disclosure through engagement with the SEC and ILPA, and our public pension peers directly — encouraging them to agree to heightened disclosure requirements found in the ILPA template,” according to a spokeswoman.

In the past, CalPERS and other state and local pensions have argued that enhanced disclosure could limit their ability to invest with top-quartile managers. But GPs who spoke with Buyouts indicated that their firms could provide aggregate portfolio company fee data to LPs, though one said such an undertaking would be a “major hassle” for the firm’s accounting team.

Know what’s big hassle? Not understanding the full costs of your pension’s investments.