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Washington pays lower PE fees than peers: report

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  • Overall costs are below benchmark
  • Washington generates savings by avoiding funds-of-funds
  • $79 bln pension does not treat carry as a cost

The Washington State Investment Board paid $481.8 million in investment management costs in 2014, including approximately $359 million in private equity fees and expenses, according to a CEM Benchmarking report obtained by Buyouts through an open records request.

The $481.8 million total represents a significant discount from what CEM Benchmarking would expect of a pension of Washington’s size, approximately $79 billion. Benchmark costs for comparably sized pensions run at around $635.6 million, meaning Washington saved approximately $154 million in costs, according to the report.

While Washington’s costs fell below its benchmark, the CEM report notes the retirement system does not regard carried interest as an external investment management cost. Some state pensions, including South Carolina’s and Kentucky’s, report carried interest as a fee, which makes their overall costs appear significantly higher.

Even so, Washington employed cost-saving measures for its private equity portfolio. The pension’s strongest savings within PE came from its lack of funds-of-funds exposure. Investments in funds-of-funds tend to be more expensive. Those vehicles often have two layers of fees, those charged by the fund-of-fund manager and those charged by the managers of the underlying vehicles.

The retirement system’s peer group has 10 percent of its hedge, real estate and private equity allocations in some form of funds-of-funds, according to the benchmarking report, whereas Washington does not have any exposure to funds-of-funds.

In addition to lower costs, Washington generated stronger returns because of its unusually large private equity portfolio, according to CEM Benchmarking’s report. Washington’s allocation to private equity hovered around 24 percent over the last five years, more than double the 11 percent average of its peers.

While Washington’s private equity portfolio slightly underperformed its peer average on a 5-year basis — 14.9 percent versus 15.1 percent — its portfolio delivered significantly higher returns than every other asset class. The combination of size and performance resulted in a stronger overall performance for Washington.

Washington’s overall investment portfolio netted 10.2 percent over the last five years, well above the U.S. public pension median return of 9.8 percent.

Washington continues to be an active investor in private equity. In September, the pension committed up to $750 million to Warburg Pincus’ latest flagship fund, which has a target of $12 billion. The pension valued its private equity portfolio at approximately $17.7 billion as of June 30, according to pension documents.

Action Item: A report on Washington’s investment portfolio is available here:http://1.usa.gov/1j5qheq