Asia lawyers defend CalPERS on carry

Private equity lawyers in Asia observing the controversy stemming from the California Public Employees' Retirement System (CalPERS) releasing detailed carried interest data last week have reacted with surprise that there is a controversy at all, and praised the $290 billion pension plan for placing the numbers in the context of investment performance, according to a report from sister title Private Equity International. 

The media headlines describing the carried interest payments as “hidden fees” or costing pension plans more than they had realized represent a “little bit of a storm in a teacup”, one Asia-based lawyer reportedly said. 

The data release showed that CalPERS paid its active general partners a total of $3.4 billion in carried interest since 1990, and realized $24.2 billion in net gains, as reported by pfm.

“There will undoubtedly be many in the ‘anti-private equity’ crowd who will point to the large headline sum that CalPERS has paid out, but thoughtful analysis will, I hope, demonstrate that large carry payments are simply evidence that CalPERS has allocated their capital to the asset class well,” the lawyer said. “Indeed the numbers back that up with CalPERS’ net returns for private equity far exceeding their other asset classes over the past 20 years.”

In a recent comment letter, pfm said that CalPERS’ carried interest disclosures represent the industry’s next public relations battle. As more retirement systems follow CalPERS lead, managers are worried that media outlets will use the numbers to paint private equity as an investment strategy not worth its costs. 

But lawyers on the ground are justifying CalPERS’ private equity portfolio.

“Would you rather have 12 percent plus net [CalPERS private equity returns] with high fees or 8 percent plus net [their public equities returns] with no fees? The answer is pretty obvious,” the Asia-based lawyer said.

A second Asia-based attorney echoed the sentiment, telling PEI that Asia managers are “widely supportive of transparency and full disclosure” and feel confident that investors understand their “fees and carry are appropriate in light of their investment performance.”

The lawyers said CalPERS was right to couple its carried interest data disclosure with a discussion on investment performance, and questioned the controversy surrounding the numbers. 

“These are legitimate fees being charged for investment of funds and charged on a model of fees and fee structure that are very well known in the industry. It’s been brought up to look bad because CalPERS has aggregated total fees paid over a period of more than 25 years,” a third Asia-based attorney was reported as saying.

Ultimately, the increased media attention around carried interest payouts, coupled with increased regulatory oversight over the US industry, may result in Asia managers declining capital commitments from US investors, the lawyer said.