Amended California PE transparency bill to exclude many existing funds

  • CalPERS amendments limit compliance to new commitments
  • AB 2833 clears appropriations committee hurdle
  • LACERS may go “back to the drawing board” on its objections

California Treasurer John Chiang and Assemblyman Ken Cooley plan to amend a state bill requiring public pensions to disclose more information about private equity fees and expenses, sources told Buyouts.

The new amendments are the result of suggestions compiled by California Public Employees’ Retirement System staff, which previously indicated it would support the bill with significant changes to provisions requiring existing funds to come into compliance. The CalPERS board voted to support the bill at its May meeting.

AB 2833 requires general partners to provide California pensions with reports detailing fees and expenses paid by their funds, investors and portfolio companies, as well as gross and net return information. The pensions would then publish this information each year.

The bill was sponsored by Cooley with significant input from Chiang, who sits on the boards of CalPERS and California State Teachers’ Retirement System. An early version of the bill, known as AB 2833, recently cleared the appropriations committee by a vote of 20-0 en route to the Assembly floor.

Limiting the scope

In its current form, AB 2833 applies to funds formed after Jan. 1, 2017, as well as any fund seeking an amendment or extension after that date. The new amendments agreed to by Cooley and Chiang limit the bill’s scope to new commitments, as well as any pre-2017 vintage funds seeking follow-on capital from a California pension.

“The thing that gives us some confidence is the fact that CalPERS (and possibly CalSTRS) is already working on getting the type of disclosure the bill is asking for,” said Deputy Treasurer Grant Boyken. He added that California’s largest pension plans are “going to be asking that of their existing partners.”

CalPERS, the nation’s largest public pension, began asking PE managers for portfolio-company-level fee information over the past few months, Buyouts previously reported. The retirement system elicited the ire of Chiang and other public officials in 2015 after staff revealed it hadn’t kept track of the amount of carried interest collected by its managers.

Similar revelations at CalSTRS prompted the board last year to call on staff to identify strategies to better track PE fees and expenses.

In addition to limiting disclosure to new commitments, an amended version of 2833 will define which “related parties” would have to report fee and expense information, sources said. Cooley’s office will also craft language separating the mandatory reporting of carried interest from that of fees and expenses, as calculated by retirement systems.

Another amendment will recognize the public pensions’ ultimate authority and fiduciary duty on matters relating to investment.

Impact on smaller pensions

It’s unclear how an amended version would affect the previous assessments released by smaller pensions like Los Angeles City Employees’ Retirement System and Los Angeles Fire and Police Pensions, both of which opposed AB 2833 as it was originally written. LAFPP’s board formally opposed the bill at its May 19 meeting. LACERS’s board adopted a similar proposal last month.

Both Los Angeles pensions warned that the bill could lead to the possible exclusion of California pensions from certain funds, according to investment memos compiled by staff.

The Treasurer’s office had yet to analyze the critiques offered by the smaller retirement systems as of late May.

Cooley said he expected “the big pension funds will work through the most effective ways to implement these requirements, and smaller pensions will benefit from that pathfinding.”

“Even if there are costs in reaching compliance, that’s where the industry is moving toward,” Boyken said. “Every public pension should have full transparency of the costs they’re paying.”

LACERS may go “back to the drawing board” on its recommendation depending on how an amended bill is ultimately constructed, said LACERS spokesman Tom Moutes. LAFPP General Manager Ray Ciranna echoed those comments, adding that the recommended amendments are “steps in the right direction.”

To date, the bill has attracted support from both sides of of the aisle, said Cooley, a Democrat. “We’ll see how things unfold as we move forward,” he said. “In general, I see this in furtherance of a long-term health and preservation/maintenance of pensions in the state.”

Action Item: CalPERS staff’s suggestions:

California Assemblyman Jerry Hill (left) speaks with State Controller John Chiang before  Gov. Jerry Brown delivers his State of the State address at the State Capitol in Sacramento on January 18, 2012. Reuters/Max Whittaker