UPDATE: CalPERS plays defense on fees

A fact sheet on the pension’s website attempts to clear up misunderstandings about the asset class, while a letter from a board member accuses the investment committee of propagating ‘GP propaganda.’

The California Public Employees Retirement System (CalPERS) is continuing to cope with the fallout from recently uploaded videos of its August 17 Investment Committee meeting, in which staff struggled to answer board members’ questions about the fundamentals of private equity.

During the meeting, managing investment director of private equity Réal Desrochers and portfolio manager Christine Gogan gave a high-level presentation on private equity cash flow distribution. The presentation prompted a string of drilled-down questions from board members on management fees, fee offsets, fee waivers and portfolio company fees, many of which staff did not or could not answer.

On Monday, the pension responded indirectly to the video’s aftershock with a web article entitled “The Facts on CalPERS Private Equity Program,” which includes information on investment returns, CalPERS’ due diligence process and its efforts for transparency.

Meanwhile, board member JJ Jelincic addressed his dismay over the “failure of [the] investment staff to perform adequately during the August Investment Committee meeting” in a letter to CalPERS CEO Anne Stausboll dated August 23.

Jelincic includes a transcription of his exchange with staff over the function of management fee offsets, and notes that the staff’s failure to respond correctly to his inquiries “raises fundamental questions of their competency.” He adds, however, that he believes the issue goes beyond matters of competency.

“Staff is perpetuating the talking points and mythology of PE fund managers, who are continuously – and largely successfully – trying to convince the limited partners that the receive a more favorable deal than they actually do,” Jelinic wrote. “The role of CalPERS staff, it seems to me, is not to propagate GP propaganda to the board but to guard against it.”

He goes on to describe his exchange with Gogan on management fee waivers – which have recently been targeted by the IRS – as “disturbingly condescending and evasive.”

Jelincic concludes by requesting that the board revisit the Private Equity Cash Flow Distribution item from August at the September Investment Committee meeting in order for staff to acknowledge “the mistakes they made” and their “breach of decorum,” and to correct the record with regard to management fee offsets and waivers.

A meeting has been arranged between Stausboll, Jelincic, CalPERS chief investment officer Ted Eliopoulos and CalPERS’ private equity consultant PCA, likely to be held next week.

As of now, the September 15 Investment Committee meeting agenda only includes a private equity investment update from Desroschers.

****UPDATE: On Wednesday, pfm learned that board chair Henry Jones, who responded to Jelincic’s letter on behalf of Stausboll, has denied Jelincic’s request that the Private Equity Cash Flow Distribution item be added to the September meeting. The separate meeting with Jelincic and staff will be the only forum in which they will discuss the issue, and staff and PCA will prepare a written response to address Jelincic’s questions. Jones added that, having been present at the meeting and reviewing the situation, he did not agree that there had been a breach of decorum by staff.