After much anticipation, the California Public Employees’ Retirement System (CalPERS) released carried interest data late last year that several media outlets were quick to spin as private equity somehow being more expensive than investors had realized, and that fees charged for outsized performance were egregious (when in fact they were shown to be below industry standards). It was yet another reminder that often the reporters writing such stories don’t understand the core concepts and structures of the asset class.
A few select headlines to illustrate the point:
“CalPERS fee disclosure raises question of whether private equity returns are worth it”
– The Los Angeles Times
“Calpers’ Hidden Private-Equity Fees: $3.4 Billion”
“Pension plan must face reality”
– San Francisco Chronicle
It’s a shame to see private equity – and indeed CalPERS’ success as a limited partner – misconstrued on the back of what was a positive disclosure. But it’s also an important reminder of the uphill battle for public opinion that both LPs and GPs face.
As transparency and reporting standards evolve, the public will increasingly be exposed to private equity-related stats and information that can easily be misunderstood or misconstrued – even, as the CalPERS release shows, when proper context has been provided.
Thus it’s more important than ever that both LPs and GPs do more to engage with the public and various stakeholders to better explain how and why private equity works. This is not a task managers are used to undertaking – they typically would rather keep their heads down, do deals and mind their portfolio companies – nor LPs for that matter, many of whom simply haven’t the resources for anything beyond due diligence on investments. But if things don’t improve, there could be two very significant consequences: one, GPs are more likely to be targeted with more unwanted and ill-thought-out legislation; and two, big LPs may find it harder to commit capital to the asset class as “headline pressure” impacts their actions.
We’ve said this before, but we’ll say it again: in addition to supporting industry trade groups and associations working to educate the public and policymakers, managers should engage the media directly to tell their portfolio company success stories. And to discuss new industry developments like a standard fee reporting template being developed by The Institutional Limited Partners Association (ILPA). Likewise, just recently, Invest Europe (formerly the European Private Equity and Venture Capital Association) published a refined set of best practices (the Professional Standards Handbook) that features new guidance on fee and expense reporting that could be used as counterevidence to claims that greater fee transparency is not taken seriously by managers.
Unless GPs and their investors bring these success stories and advancing of best practice to reporters’ attention with greater force, and convince them of their importance, the risk is that negative headlines continue to proliferate. The prospect of more pension plans under pressure to explain the value of their private equity portfolios to skeptical reporters unable or unwilling to grasp the asset class’ mechanics is not one that anyone relishes.
The unfortunate reality is that private equity is an easy media target that is not always understood well by those outside of the industry. As more carry data is inevitably disclosed by other LPs, and the spotlight on private equity and tax intensifies during the US election cycle, it will be up to the industry’s best and brightest to help frame public discourse. Our advice? Start now and be proactive, not just reactive.