The $16.45 billion Oklahoma Teachers Retirement System is considering taking on external back office administration support to identify and rectify errors.
At a meeting in March, Oklahoma TRS discussed issuing a request for proposals from qualified firms to provide “a wide range” of private market back office administration services, including operational due diligence, private market reporting and a central data repository.
The Institutional Limited Partners Association has teamed up with consultant Colmore for a new membership service to enable institutional investors to validate fees, expenses and carried interest allocations charged by fund managers.
The Fee Allocation Incentive Reporting programme comes on the heels of ILPA’s new template, launched in March, which provides portfolio company metrics to limited partners.
“We are the next step. We take the template data points and turn it into insights for LPs,” Colmore chief executive Ben Cook told sister title Private Equity International.
Fees are a recognized pain point for investors, and they haven’t been able to find a straightforward way to validate them, Cook said.
Institutional investors, including New Mexico State Investment Council, California State Teachers’ Retirement System and Brunel Pension Partnership, use Colmore for ongoing analysis on fees based on their existing general partner documentation.
The process is straightforward, Cook said. When a GP sends its fee charges to the LP, it simply adds Colmore to the emails. Colmore checks the fees against the limited partnership agreements and other documents, and flags any discrepancies.
Oklahoma’s private equity consultant Franklin Park, which manages 61 private equity funds for Oklahoma TRS through a fund-of-one structure, found four significant errors in the pension plan’s private markets investments last year as part of its operational oversight.
A China‐based venture fund in Oklahoma TRS’s FP Venture 2015 vehicle calculated and reported the fund manager’s carried interest incorrectly by 1.7 percent, or $900,000, on inception-to-date profits of $53 million in the June statement.
In another instance, a US healthcare buyout fund incorrectly withheld $153,341 of cash distribution to pay Illinois state tax, which the pension system was not liable to pay as a tax-exempt investor.
Additionally, a US‐based turnaround fund incorrectly reduced TRS’s unfunded commitment balance by the amount of the cash distribution notice it had issued, and a Nordic region-based fund in the FP International 2016 vehicle incorrectly accounted for and misreported capital contributions made to the fund.
In all cases, the errors were acknowledged by the GP.
Errors do happen, according to a source who tracks fee validation services.
In one case, the limited partner was classed incorrectly and therefore charged incorrect management fees for years. In another, a GP did an inception-to-date recalculation of fund expenses and charged a catch-up without disclosing it to its LPs, resulting in a significant fee hike for the quarter. In some cases, GPs did not accrue for carry even though they were required to do so by generally accepted accounting principles, thus overstating their net asset values. In several instances, there was a misrepresentation of step-down of management fees, the source said.
An outside vendor would help Oklahoma TRS manage ongoing due diligence, monitoring, operational and reporting aspects of its private markets portfolio. The vendor will verify capital calls and distributions against the LP agreements and subscription documents, review capital account and financial statements every quarter, track and verify management fees and carried interest and monitor investments against GP policy limits, among other tasks, a note for the potential RFP sturcture said.
Last year, the Oklahoma TRS staff was responsible for managing 111 capital calls and distributions – 18 of which were in private equity, 24 in private credit and 69 in non-core real estate. Complexity would increase as the pension’s private markets portfolio increases in the coming years, the note said.
Oklahoma TRS’s $2.75 billion private markets portfolio is invested in 82 alternative market vehicles, including the 61 private equity funds managed by Franklin Park, within a fund-of-one structure, four private credit funds, three core real estate funds and 14 non-core real estate funds.
The pension system will pay between $200,000 and $500,000, or between $2,500 and $6,000 per fund, depending on the level of service required.
Last year, New Mexico State Investment Council and California State Teachers’ Retirement System hired Colmore to track their fees and expenses to ensure they were not overpaying for their private markets programs.