The year of the fee cut

This week the California Public Employees’ Retirement System was presented with a plan by law firm Steptoe & Johnson that would change the way in which external fund managers will be paid.

Under one of numerous recommendations made by the law firm, CalPERS would insist nearly all fees it pays to external managers be incentive fees based on successfully investing CalPERS’ assets and not in management or other fees. Also, fees should be documented in a transparent and straightforward manner.

Pension consultants say that the recommendation takes direct aim at private equity managers.

“Managers are getting less wiggle room in how they deal with CalPERS. And there wasn’t much room to begin with. It’s getting laughable and frankly, insulting,” said one pension consultant familiar with CalPERS’ alternatives programme.

Another pension consultant said a lot of the language in the recommendation is for show.

“I think the board recognises that the world watches every move they make and they continue to lead by example. At the same time, private equity is in no danger of becoming less prominent. Managers will work with whatever guidelines are put forth and Sacramento will continue to have a healthy appetite for private investment.”

The pension has been cracking down on fees since 2008, and became more aggressive in its quest when it was revealed a former CalPERS board member, Alfred Villalobos, had been paid millions to help solicit CalPERS' money for Apollo Global Management, even though the pension owns a stake in Apollo.

CalPERS has obtained more than $200 million in fee concessions from investment managers, and about $100 million in fee reductions from other large external money managers.

But they aren’t the only ones paying managers less: industry-wide, alternatives fees are dropping, according to US-based investment consultant Mercer. Mercer polled more than 4,000 alternative investment fund managers and found that fees charged by alternative investment managers fell an average of 4.5 percent during the last two years.

The demand for fee cuts and transparency was a significant trend for private equity managers this year and will likely continue on into 2011. PEM will continue to keep you posted on trends as they happen.