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Fee fight shows need for more private equity transparency

In California, a bill is being ironed out in the State Assembly that would force private equity managers to disclose to state pensions fees and expenses paid by LPs and portfolio companies, as well as gross and net returns. GPs would annually and publicly report the information.

This is an important bill that will likely undergo various changes before it reaches the Governor’s desk. I hope it doesn’t lose its teeth, because this is the sort of information the public should have available.

Why? Because all constituents — retirees, taxpayers, politicians, reporters — should understand how capital is being invested at America’s largest public systems. Not just that ‘Pension A’ invests in private equity, but that ‘Pension A’ invested this much in these specific private equity funds on these terms, and here’s the rationale behind the investment decision.

This takes on more significance at a time when pensions are desperately underfunded and depend more and more on riskier assets classes like PE to meet their obligations.

As risk increases, so should transparency. To be clear, some systems are better than others in what they disclose to the public. Some make all headline terms like management fees, fee offsets, preferred return, carried interest rate, available. This level of disclosure at some retirement systems discredits arguments by other systems that they don’t want to disclose ‘trade secrets’. The information isn’t secret if it’s already out there available to anyone with access to the internet.

Earlier this week, I reported on a previously undisclosed dispute between CalPERS and private equity firm Thomas H. Lee Partners over interpretation of language in the limited partner agreements for Funds V and VI. The disagreement centered on accelerated monitoring fees and on GP co-investment vehicles not paying fund expenses.

CalPERS said it should be reimbursed for inadequate disclosure of these practices. TH Lee argued that it provided robust disclosure of these practices and complied with the LPAs.

It took six months for me to track down the back and forth between CalPERS and TH Lee, after getting an initial tip about a heated disagreement last year. My process included several weeks of back and forth with CalPERS on open-records requests, which the system rejected in full.

The process shouldn’t be anywhere near this difficult. In fact, the information around fees, expenses – even contract terms in my opinion — should be publicly available, right on CalPERS’s website. When a dispute like this comes up, it shouldn’t remain hidden behind closed doors, but out in the open where everyone can understand what is at stake.

Why leave it to a few select people on the pensions’ PE investment teams — who very well may turn over halfway through a fund’s life, setting up new people with less knowledge of the thinking when agreements were signed — to manage a GP relationship?

Rather, let’s have a long, documented process of transparency: the initial contract, and subsequent financial reporting like capital calls and distributions; as well as any amendment changes to funds through its life. Keep a long history of a system’s relationship with a GP, right on the website, available for public view.

This is stuff the public should know about. Stop locking it away.