CalPERS staff sought changes in transparency to limit disclosure

  • CalPERS staff sought softer language in California bill
  • Unclear why staff sought to limit disclosure
  • CalPERS disputes idea that it advocated less disclosure

California Public Employees’ Retirement System staff sought to weaken language in a bill requiring private equity firms to provide additional disclosure of fees and expenses.

An original draft of the bill was introduced by Assemblyman Ken Cooley with the support of State Treasurer John Chiang in February. The draft required general partners to provide California’s public limited partners with information about the total fees and expenses charged to portfolio companies by the GPs, their affiliates and related parties.

CalPERS staff requested amendments requiring GPs to provide California LPs with just their pro-rata share of those fees, four sources with knowledge of the amendment process told Buyouts. A new version of the bill, with language amended per CalPERS’s request, is being considered by the California Senate.

‘An important first step’

“In a perfect world, we would know the full fee burden. The long-term value of a portfolio company is impacted by the fees. But we view the legislation we’re running this year as an important first step,” said Deputy Treasurer Grant Boyken, who worked on the bill.

PE firms often use several investment vehicles to buy portfolio companies. Even if an LP knows its pro-rata share of fees as an LP in a single fund, lack of insight into other vehicles make it impossible to determine the total fees and expenses charged to portfolio companies.

Why CalPERS sought to limit the level of disclosure sought by the earlier version of AB 2833 is unclear.

Update: In a statement, CalPERS disputes that what it advocated for amounted to less disclosure. “CalPERS staff did not advocate for less disclosure; in fact staff advocated for broad disclosure through engagement with the SEC and ILPA, and our public pension peers directly — encouraging them to agree to heightened disclosure requirements found in the ILPA template,” according to a spokeswoman.

The state’s other major pension, California State Teachers’ Retirement System, did not make any such request, Buyouts confirmed.

CalSTRS staff did have other concerns, however. The bill lacks language that prioritizes the system’s fiduciary responsibility over the disclosure requirements, retirement system spokesman Ricardo Duran wrote in an email.

Furthermore, additional disclosure “could result in some managers choosing to forgo California public pension plan partnerships and instead accept commitments from other investors without the same requirements,” CalSTRS staff wrote in an April 12 memo. CalPERS staff noted a similar concern in a May memo.

CalSTRS and CalPERS spokesmen would not say which, if any, GPs warned of their inability to take commitments from California pensions if earlier versions of the bill became law. The scenario is not without precedent, however.

Sequoia Capital sought to end its relationship with the University of California in 2003 in an effort to conceal data on cash flows and returns, according to an Associated Press report. Although the University of California continued to receive allocations to Sequoia funds, the endowment has not published performance data on those commitments since 2003.

“Whenever we look at bills we fully examine the impact they could have on us. That includes looking at all possible risks, actual or potential,” CalPERS spokesman Joe DeAnda told Buyouts in an email.

GPs contacted by Buyouts varied in their assessments of whether their firms could provide the level of detail that the original version of the bill required. One source called the requirements a “major hassle,” while others said their firms already provided, or could readily provide, aggregate data on fees and expenses charged to portfolio companies.

Transparency activists object

Even with changes made over the past two months, the amended version of AB 2833 requires greater disclosure of costs incurred by local pension systems like Los Angeles City Employees’ Retirement System and San Francisco Employees’ Retirement System, sources told Buyouts. Those enhancements mirror similar changes already under way at CalPERS, sources said.

“AB 2833, as amended, requires data collection and disclosure that is very similar to what CalPERS has already started to require for new PE funds,” DeAnda wrote in an email.

Those changes may not be enough to sway early proponents of the bill, however. Former CalPERS private equity chief Leon Shahinian testified about the “weakened” version of AB 2833 in June. In a letter to State Senator Richard Pan, former CalPERS board member and New Mountain Capital adviser Michael Flaherman urged the Senate to reject the amended bill.

“By telling LPs just their pro-rata share, the LP doesn’t know the full fee burden placed on the portfolio company, since they don’t know all the vehicles [used in each transaction],” Flaherman told Buyouts.

“This is the game the GPs have been playing for years. To keep the LPs from seeing the whole pie, and from seeing the whole pie is much larger than they understand.”

While the bill offers marginal improvements in the reporting of fees, expenses and carry, CalPERS board member JJ Jelincic called the new version of the bill “worse than when they started amending it.”

The CalPERS staff’s “goal was to make the bill reflect our current reporting practices,” he said. “If the reporting practices were any good, we wouldn’t need the bill.”

Action Item: To read each version of AB 2833, visit

A man takes in the view of the fog-shrouded Golden Gate Bridge from the Marin Headlands in Sausalito, California, on September 24, 2008.  Photo courtesy Reuters/Robert Galbraith 

Update: The article was updated to include additional comment from CalPERS.