The $185 billion California Public Employees Retirement System has publicly endorsed the new terms and conditions best practices proposed last week by the Institutional Limited Partners Association, the trade association for limited partners to private equity funds.
“These principles mark the beginning of a new chapter in the private equity industry,” Joseph Dear, CalPERS’ chief investment officer, said in a statement. “As our capital commitment to private equity grows, it is important that the nature of our partnerships also evolve to include improved governance rights consistent with the maturing of the asset class.”
The guidelines specify that management fees should cover reasonable operating expenses of the firm and not be “excessive”; that the general partners’ capital commitment to the fund should be substantial, with a higher percentage in cash; and that there should be stronger provisions to help avoid profit distribution imbalances between the GPs and LPs. The guidelines also state that LPs should have stronger governance rights, and that GPs should be more transparent about fees and carried interest profits received, as well as portfolio company performance.
In June CalPERS said it would begin negotiating with private equity managers with whom it wants to form relationships to reduce fees, a spokesman for the pension said. The pension will also will ask its existing managers to cut fees when they seek more money from CalPERS.
Performance fees should be based on long-term performance, and mechanisms such as delayed realisations and clawbacks can better align long-term interests of managers and investors, CalPERS said. Management fees, meanwhile, should better reflect the cost associated with generating performance and not be an invitation for asset gathering.
“In this market, the primary source of wealth creation is capital gains and should be that, not fees,” the spokesman said. “There needs to be a greater focus on justifications of management fee levels.”
CalPERS recently boosted its allocation to private equity from 10 percent to 14 percent as a way to address the “misalignment of the portfolio in the wake of the financial market crisis of 2008”.