Montana launches inquiry into carried interest

Montana Board of Investments launched an initiative to get a better handle on the amount of carried interest its general partners collect, according to state documents and Executive Director David Ewer.

The Board of Investments developed a template to seek quarterly disclosures from its private equity fund managers. The template is “conceptually very similar” to the one released by the Institutional Limited Partners Association in January, Ewer wrote in an email.

ILPA’s template includes line items for a variety of fees and expenses charged by fund managers, as well as waivers, offsets and carried interest. The Board of Investments endorsed the ILPA template upon its release.

A copy of Montana’s template could not immediately be obtained.

GPs typically carve out their portion of an investment’s profits when they deliver returns to their limited partners, Portfolio Manager Ethan Hurley told Montana’s board in February, according to meeting minutes.

While GPs often detail carried interest in their financial reports, many LPs did not account for this information.

“Our information request is to get a more detailed explanation of the components and timing of carried interest, which is our principal point of inquiry,” Ewer wrote.

The inquiry will likely be lengthy. Montana’s PE portfolio is roughly $1.1 billion, with some 168 fund commitments, according to its May meeting materials. Similar efforts at other pensions, such as California Public Employees’ Retirement System, took several months, and 6 percent of its GPs declined to provide relevant information, Dow Jones reported.

“No one has actually pushed back, but not everyone has responded,” Ewer wrote in an email. Asked what percentage of firms had responded, Ewer responded: “I don’t have those numbers at this time but am not aware of any actual refusals. We have many GP managers and so expect this process will take some time.”

Recent activity

Montana continues to be an active investor in PE throughout its inquiry. The $9.9 billion retirement system committed $35 million to Centerbridge Special Credit Partners III in May.

Centerbridge Partners is seeking $5 billion with a $6 billion hard cap for its third distressed-debt fund. The firm will divide the vehicle into two tranches. The smaller tranche, representing 25 percent of the capital raised, will be deployed first. Centerbridge will activate the second tranche, known as the reserve fund, as more distressed opportunities emerge.

Montana committed $77.5 million across four previous Centerbridge funds, which netted an aggregate internal rate of return of 6.6 percent as of Dec. 31, according to its meeting materials.

Montana’s meeting materials also disclosed a $20 million pledge to HarbourVest Partners’ Dover Street IX, which it made in February. HarbourVest reportedly set a $3.6 billion target for its latest secondaries fund.

The Board of Investments had an 11.1 percent allocation to PE as of March 31, according to its meeting materials. Through Dec. 31, the portfolio delivered an IRR of 12.4 percent and a 1.5x multiple.

Action Items: Montana’s meeting materials: http://bit.ly/1X17fY0; ILPA’s template: http://bit.ly/1TXsA23

Austin Freer plays the violin in camp after wranglers gathered some 350 horses during Montana Horses’ spring drive outside Three Forks on April 22, 2011. Reuters/Jim Urquhart