Los Angeles City Employees’ Retirement System, one of the standouts among public pensions on private equity transparency for the public, has taken a major step backward.
LACERS typically notifies its board and the public of new PE commitments in its meeting materials, which include information about management fees and carried interest that the system expects to pay over the course of a fund’s life.
Memos detailing its three most recent fund commitments contained no such information.
Instead, each of the memos contains this meaningless statement: “Fund management and incentive fees are comparable to similar strategies and the GP will invest alongside limited partners, providing alignment of interests.”
This raises a couple of questions: How does LACERS define similar strategies? How are the terms comparable? How much will the general partner invest? How else is the firm aligning itself with its fund investors?
LACERS’ reasons for omitting information it previously provided remain unknown. General Manager Thomas Moutes declined to comment.
This retreat from transparency is hardly new or unique, especially in California.
Los Angeles County Employees Retirement Association recently began considering certain private fund investments in closed session, away from the prying eyes of the public or reporters. University of California Board of Regents hasn’t released return data for its holdings in certain venture capital funds for more than 15 years, despite regularly publishing similar data about other private holdings.
Of course, PE firms have an interest in making sure their practices remain under wraps. So much so, GPs occasionally refuse to provide information over email or in writing for fear their communication will be subject to a Freedom of Information Act request, one public-pension LP recently told me.
That fear isn’t unfounded. Public access to emails, investment memos and due-diligence reports are gold mines for information on fund terms and holdings, and often contain red flags to prospective investors.
Take, for example, this 2014 Buyouts story about Yucaipa Cos, which includes information about returns generated by the firm’s investment in Whole Foods. GPs typically guard their return data on individual portfolio holdings tightly. In this case, Buyouts obtained Yucaipa’s return on the Whole Foods investment from a due-diligence memo prepared by Franklin Park, which was provided by Connecticut Retirement Plans and Trust Funds via an open-records request.
The same Franklin Park report also provided a partial list of Yucaipa’s fund LPs (including nonpublic entities), as well as information about then-pending lawsuits and a breakdown of how the general partner distributes its carried interest among Yucaipa executives.
The volume of information Connecticut provided on Yucaipa was unusually detailed. Most public pensions will redact or reject similar open-records requests, citing rules that exempt certain financial details from open-records laws. Public pensions vary in their application of those exemptions, but they have an incentive to keep things behind the veil.
GPs don’t want their laundry aired out in a public forum, and many pension officials argue that successful firms are less likely to do business with institutions that make such information publicly available.
By the same token, obfuscating fund terms and other specifics saves pension staff from showing their hand in negotiating the terms of future investments. A more cynical take suggests it also saves them from embarrassment should they agree to more unfavorable terms (which never, ever, ever happens).
LACERS’ apparent decision to reduce the amount of information it includes in its public meeting materials goes beyond that standard, however. The level of detail in previous reports hardly delved into minutiae like executive compensation or portfolio-company returns. Instead, it was top-line data on the fund’s annual management fee, the GP’s share of the carried interest and the fund’s duration.
This is valuable, pertinent information for retirement beneficiaries who want to know how their retirement savings are being invested and the costs associated with those investments.
Last year, California codified the level of disclosure around private equity fees, expenses and costs that state and local pension systems must provide to the public. Retirement systems now must provide annual reports detailing the amount of fees and expenses charged by new fundraises, in addition to carried interest collected by their funds’ general partners.
The bill passed with unanimous support in the state’s legislature, which indicates Californians (at least those who care) want to know more about private equity’s costs in relation to its returns. But the data pensions will have to provide under the law is relatively meaningless without basic information about how firms calculate their fees and carry.
I’m left wondering about LACERS’s rationale for backing away from its former transparency around private equity. Meantime, members of the public — including retirees, taxpayers, legislators and reporters — are being left in the dark.