JJ Jelincic, a California Public Employees’ Retirement System board member, is preparing to dig into a sandwich at a California diner.
“You shouldn’t go to a barbecue place if avoiding a mess is a priority,” he said.
Jelincic (pronounced juh-LIN-sic) has uncovered quite a few messes at CalPERS lately. In October, he met with Buyouts to discuss his ongoing battle with the pension’s investment staff, which struggled in recent months to explain the costs of its $27.5 billion private equity program.
Jelincic has been a vocal critic of private equity at CalPERS’ public board meetings, which are recorded and posted online for the world to see. His consistent questioning seems to have helped bring change: The system recently published the amount of carried interest its active GPs took as profit share. On November 16, the pension hosted a wide-ranging workshop to outline how different fee and fund structures impact returns.
But Jelincic wants more. He wants the $293.5 billion retirement system to publicly dictate the terms it wants from its private equity managers. He wants the pension to set limits on what it will pay, the types of services and fees it will pay for, and the terms it won’t accept. And he wants everyone to know where the system stands.
“I’m not sure why we would want to do business with somebody who won’t tell us up front: ‘These are the fees we’re going to charge you,’” Jelincic said at the pension’s November 16 meeting. “If we’re leaders, we need to step out and say: ‘These are our standards.’”
It’s a hefty request and CalPERS staff has pushed back. But those requests aren’t unusual for Jelincic, a CalPERS investment officer who began his career as a truck driver and Teamsters member.
“If a dime is coming out of my trust fund — either because I’m writing a check, or because one of the companies I own is writing a check — I need to know what it is [and] what it’s for,” he told Buyouts.
Jelincic’s most recent battle with staff began at the pension’s April board meeting with a few simple questions. He asked CalPERS Chief Operating Investment Officer Wylie Tollette whether staff knew how much carried interest its managers collected. The total was “not explicitly disclosed or accounted for,” Tollette said. “We can’t track it today. That’s not just a CalPERS issue, that’s an industry issue.”
But Tollette was mistaken. Many smaller pensions, including the New Jersey Division of Investment and Retirement System of South Carolina, actively track the amount of carried interest their managers carve out of their net return. Jelincic assumed CalPERS, which is considered one of the industry’s most important limited partners, did the same.
“When staff told me they did not know what we were paying in carry, quite frankly, my first reaction is they were lying,” said Jelincic. “They’ve since convinced me they really didn’t know.”
The questions posed by Jelincic underscored larger, long-running concerns about private equity’s costs. The SEC recently levied enforcement actions against Kohlberg Kravis Roberts & Co and Blackstone Group for issues related to improperly disclosed fees and expenses. Earlier this year, a coalition of state treasurers and comptrollers petitioned the SEC for greater oversight of the industry.
“The questions [posed] by JJ were softball questions,” said Eileen Appelbaum, a senior economist at the Center for Economic and Policy Research and author of Private Equity at Work: When Wall Street Manages Main Street. “Did JJ bring this to the public’s attention in a way that no one else has? Yes.”
Six months after Jelincic’s exchange with Tollette, California Treasurer John Chiang proposed legislation that would require general partners to disclose all fees, carry and expenses to California pensions. The Institutional Limited Partners Association is finalizing a reporting template to help LPs better capture costs.
“I really did not expect to launch something that, I believe, in relatively short order and definitely in the longer term, is going to change the industry,” Jelincic told Buyouts. “When I can’t get an honest explanation about how fee waivers work, or how much the GP is collecting in that situation, that raises some questions.”
Good cop/bad cop
In his 25-plus years as a CalPERS investment officer, Jelincic worked as a stock trader, a corporate governance specialist and on the real estate team, but he never covered private equity.
Upon taking a leave of absence to join the CalPERS board in 2011, he developed an interest in how private equity might be contributing to the declining number of workers covered by defined benefit plans. Such plans, which are offered by CalPERS, give workers guaranteed lifetime annuities upon retirement. Defined contribution plans — such as 401(k)s — provide a cheaper alternative for employers, but retirees’ expected income is subject to the volatility of their investment portfolios.
The proportion of private wage and salary workers participating in defined benefit plans fell from 38 percent to 20 percent between 1980 and 2008, the U.S. Social Security Administration reports. CalPERS’ portfolio previously included exposure to Warburg Pincus– and TPG-owned retailer Nieman Marcus, which froze its defined benefit plan in 2007. CalPERS also had a stake in a Madison Dearborn fund that once owned Boise Cascade Co, which froze its workers’ pension in 2009. At CalPERS’ November 16 board meeting, Chief Investment Officer Ted Eliopoulos indicated there are likely many examples.
Those situations imply CalPERS is willing to fund its defined benefit plan by investing in firms that freeze pensions held by private companies, Jelincic said. “Besides being a bit hypocritical, one of the big problems public plans have is political support. And as other people have lost defined benefit plans, they develop an attitude of, ‘Well, I got screwed; you oughta get screwed, too.’”
Jelincic comes from a blue-collar background. Prior to joining CalPERS’ investment office in 1986, he worked as a garbage truck driver in Oakland, California, where he developed a reputation as an active member of the “very militant” Teamsters Local 70, former Chapter President Chuck Mack told Buyouts.
“He was always active in the discussions that went on at the local union [and with] the collective bargaining agreement,” Mack said, adding Jelincic’s aggressiveness extended to his questioning of Local 70’s leadership. “‘How are you running the local union?’ ‘Why are you doing this?’ ‘Why are you doing that?’ … They were good questions. Sometimes they would rankle, but they were good questions.”
Jelincic once went over the head of Local 70 to sue Oakland Scavenger Co for unsafe working conditions, even after the union and the company had already resolved issues relating to his claims. The National Labor Relations Board dismissed the case, writing Jelincic “expressly repudiated” an earlier agreement between Local 70 and Oakland Scavenger in its findings.
“He would get very passionate about something and want to go one direction, and maybe that’s not the way you want to go,” said Neal Johnson, a CalRecycle analyst who worked with Jelincic on negotiations between California employees and the state government. “Sometimes you had to rein him in.”
Jelincic continued his involvement in organized labor as a state employee, serving as president of the California State Employees Association in the mid-2000s. According to Johnson, whenever the union used the good cop/bad cop approach in negotiating collective bargaining agreements with the Governor’s office, Jelincic almost always played the “bad cop.”
“My ex-wife used to have real problems with him because of his occasional brashness, and he had a habit of calling at inconvenient times,” Johnson told Buyouts. “But that’s the nature of the job, particularly when you’re bargaining. You have, in some sense, no life.”
His behavior ran him afoul of co-workers in other ways. In 2011, Jelincic received a formal reprimand for violating CalPERS’ sexual harassment policy after women accused him of making inappropriate comments and looking “up and down” with what was referred to as “elevator eyes,” according to a copy of the findings published by the Sacramento Bee.
At the time, Jelincic contended the accusations were personally motivated, and that he looked “up and down” because he wore bifocals. The CalPERS board censured him in 2011.
“I think the board almost had to do something … Particularly when it got reported as sexual harassment,” he told Buyouts. “My relationship with the staff didn’t particularly change. They knew me, and I am what I am.”
By his own admission, Jelincic is not always the easiest person to work with.
“I’ve called out the [CalPERS] board for not doing its job and nobody likes being called out for that. So there is some — I think — there’s some resentment and some antagonism,” Jelincic said. “The issues I’m raising are serious. I think it enhances my credibility and will probably create some leverage moving forward.”
Jelincic wants to change the way CalPERS engages with the private equity industry. In addition to his demand for more information about the costs of CalPERS’ private equity program, Jelincic wants the pension system to require managers to refrain from cutting defined benefit plans.
He also wants the pension to publicly state what terms and conditions it finds acceptable, and to refuse to commit to any manager who doesn’t adhere to them. While he concedes CalPERS staff has made a good-faith effort to bring down costs — average management fees dropped from 1.22 percent to 1.12 percent over the last three years — he wants the pension to use its clout to take a public stance on specific terms and fees.
But not everyone agrees with Jelincic. CIO Eliopoulos, who addressed Jelincic’s concerns at the November 16 meeting, said dictating terms to GPs could result in CalPERS losing access to some funds. “Publicly broadcasting our terms and conditions would negatively impact our negotiating ability, and would lessen what bargaining leverage we currently have in the private equity market place,” said CalPERS spokesman Joe DeAnda in an email.
The views of Jelincic and CalPERS staff are aligned in one regard: There is still work to be done to bring down costs. According to a November 16 presentation by Scott Jacobsen, senior portfolio manager for private equity at CalPERs, the spread between a fund’s gross return and its net return can run as high as 15 percentage points. A wider spread between gross and net returns indicates higher fees and expenses chipping away at net returns.
“I don’t mind giving a fair share to the people who are helping me earn it, but I don’t know what that share is,” Jelincic told Buyouts. “And once we find out what the real costs are, we can have a conversation about what’s the appropriate compensation.”
CalPERS will finally have a starting point for that conversation now that it has released its report on the total carried interest taken by its managers. Moving forward, ILPA’s ongoing efforts to standardize reporting and additional regulatory scrutiny may further reduce private equity’s complexity and opacity.
“I think we will see disclosures. I think fees will come down. I think carried interest will come down. And I also suspect that at some point, carried interest [will be treated] as ordinary income rather than capital gains,” Jelincic said, draining what’s left of his iced tea. “It will get there at some point, maybe not in my lifetime.”
The final quote of this story was changed because Jelincic mistakenly transposed private equity’s tax treatment with that of ordinary income.