Wisconsin to hire consultant to address fee transparency

State of Wisconsin Investment Board will seek outside service providers to address shortcomings uncovered by a recent Ernst & Young review of Wisconsin’s private equity program, Buyouts has learned.

Wisconsin had been manually inputting fee and expense data obtained from private equity general partners, spokeswoman Vicki Hearing told Buyouts in an email. GPs vary in their approach to reporting and communicating fund expenses, and Ernst & Young recommended that the state automate its processes for PE accounting and reporting “to streamline how the data is stored and managed,” Hearing wrote.

In addition to automating its reports, Ernst & Young also urged Wisconsin to implement a standardized system for fee recalculations to make the private equity program’s costs more transparent.

Wisconsin awarded Ernst & Young a $270,000 contract to assess its PE program’s accounting policies and processes in 2015.

A copy of the accounting firm’s report wasn’t immediately available.

Request for proposals

The investment board, which manages $102.9 billion of state assets, plans to request proposals from service providers in January for an “expanded scope for services and support for its private equity investments that include data and accounting support services,” Hearing said.

In addition to recalculating fees and expenses, the third-party service provider Wisconsin selects would help maintain SWIB’s records and provide third-party due diligence of PE fund managers.

StepStone Group is SWIB’s private equity consultant and its contract expires at the end of 2017. Depending on the scope of responses generated by the January RFP, Wisconsin may hire “more than one” third-party provider to advise on its PE portfolio, Hearing wrote.

Until then, Hearing said, Wisconsin staff have consolidated spreadsheets to ease the process for calculating fees. Furthermore, investment accounting activity reported by the GP is now compared with the firm’s audited financial statements.

In an email, Hearing said the timing of the Ernst & Young review was part of an ongoing multiyear project to improve Wisconsin’s technology infrastructure and internal data-management systems. The investment board is seeking an investment information-technology consultant, according to its website.

Scrutiny of costs

Interest in private equity’s complicated investment costs has intensified over the past several years, particularly after the Securities and Exchange Commission levied fines against Blackstone Group and Kohlberg Kravis Roberts & Co for issues relating to the disclosure of fees and expenses. Both firms did not admit or deny the SEC’s findings.

Public officials in states like California and New York grew increasingly critical of the industry’s disclosure practices. Like Wisconsin, California Public Employees’ Retirement System and Montana Board of Investments launched efforts to streamline processes for calculating and reporting PE-related fees and expenses.

Wisconsin was one of some 50 LPs to endorse the Institutional Limited Partner Association’s template for PE reporting. ILPA published the template in early 2016 to capture greater detail on fees, expenses and carried interest paid to GPs.

Wisconsin’s $87.6 billion core trust fund held 8.2 percent of its assets in private equity as of April 30. Beyond the core fund, the investment board manages an additional $15.3 billion of state insurance, endowment and education funds.

Action Item: State of Wisconsin Investment Board: www.swib.state.wi.u

A cheese sculpture of the Mount Rushmore national monument is seen at Ripley’s Believe It or Not! museum in Times Square in New York on February 16, 2013. Photo courtesy Reuters/Zoran Milich