Fees rise slightly at Montana even as reliance on funds-of-funds falls

Montana Board of Investments paid its private equity fund managers more than $26.4 million in fees last year, a slight increase from a year earlier.

Montana disclosed its total costs in a report prepared by CEM Benchmarking, a consultant that specializes in assessing public-pension costs. The report will be presented at Montana’s board meeting next week.

The total includes each fund’s management fee and monitoring costs, according to the CEM presentation. It does not include carried interest collected by Montana’s fund managers or any transaction costs borne by the retirement system.

Montana’s Executive Director David Ewer noted that the Governmental Accounting Standards Board does not recognize carried interest as an asset value that needs to be reported in financial statements, though the agency “may at some point change the rules,” he wrote in an email.

Montana’s PE portfolio was valued at $1.14 billion as of June 30, a report prepared by board consultant RVK shows. The board, which controls the investments of several state pension systems and trust funds, held 10.72 percent of its assets in private equity as of that date.

Overall, Montana’s $10.6 billion investment program cost the retirement system $56.66 million last year, a marginal dip from the $56.77 million it paid the year before.

Even as overall PE management fees rose, Montana’s declining reliance on fund-of-fund managers — which tend to have higher costs than traditional private funds — helped bring the retirement system’s total investment costs down from where they were in 2012, the CEM Benchmarking report shows.

Fund-of-fund fees declined significantly from last year. Montana paid fund-of-fund managers $6.86 million in 2016, an almost 18 percent drop from the $8.35 million it paid the year before.

Questions about PE-related costs arose at Montana’s May board meeting, when Vice Chairman Karl Englund asked RVK’s Becky Gratsinger whether recent media coverage of private equity-related fees and expenses affected the negotiation of fund terms.

Pressure applied by groups like Institutional Limited Partners Association around transparency and disclosure could result in more favorable terms and conditions, Gratsinger said. Limited partners considering lower-cost alternatives to traditional private equity investment — such as by buying companies directly or co-investing alongside PE firms — could also play a role.

However, “despite this alternative, investors are still finding it difficult to put pressure on an asset class that has performed well on a net of fee basis,” according to a summary of Gratsinger’s remarks, published in the board’s minutes.

Gratsinger could not immediately be reached for comment.

Action Item: More on Montana and its investment program: http://investmentmt.com

A bison walks in Yellowstone National Park in Wyoming on Aug. 10, 2011. Photo courtesy Reuters/Lucy Nicholson