- Texas Teachers’ discloses carried interest for first time
- PE managers collect $206.6 mln of carry
- Texas Teachers’ PE portfolio valued at $12.7 bln
Teacher Retirement System of Texasdisclosed for the first time details about the total carried interest Apollo Global Management and Kohlberg Kravis Roberts collected through the retirement system’s separate accounts.
The accounts, which invest across a wide range of private assets, cost TRS around $32.3 million in management fees and about $7.5 million in the form of carried interest during the previous fiscal year, spokeswoman Juliana Fernandez Heltontold Buyouts in an email. Texas Teachers’ committed $3 billion each to Apollo and KKR in 2011 and later re-upped $2 billion to both firms in 2015.
The Apollo separate account was netting a 2.59 percent internal rate of return through Dec. 31, 2015, according to data previously published by Buyouts. The KKR account netted a 12.46 percent IRR as of the same date.
Retirement-system staff previously reported the separate accounts’ management fees at the retirement board’s Dec. 1-2 board meeting, but did not provide any information about Apollo’s and KKR’s carried interest.
“We have re-examined the information provided in the schedule of fees presented to the board and determined that $7,475,427 in performance fees and carried interest were actually incurred for the 2016 fiscal year,” Helton wrote. “These fees were not included on the schedule presented to the board as they had not been recorded by TRS at the time the schedule was originally prepared.”
Texas TRS did not specify how much management fees and carried interest went to each firm. KKR declined to comment. Apollo could not be reached for comment.
Carried interest refers to the PE firm’s share of whatever profits are generated by its fund investments. Until recently, most public pensions could not or would not disclose information about the carried interest collected by their fund managers.
In its report, Texas TRS staff separated the fees and carried interest collected by Apollo and KKR from what was charged by managers of its traditional private equity portfolio. The retirement system paid PE general partners $137 million for management fees in the previous fiscal year. Those managers also collected $206.6 million in the form of carried interest.
“We modified the investment manager fee disclosure again to try to make it more complete and readable,” Director of Investment Accounting Scot Leith told the board in a video of the Dec. 1-2 meeting. “We have more fee information, including paid performance fees and carried interest. We break down the fees by those paid directly from the trust and those taken out of the NAV by the general partner.”
“We’re either invoiced for fees by the general partner or the general partner reduces the market value of the investments. When we pay fees directly, they’re a direct expense of the fund,” Leith said. “We’re hoping that this change improves the level of information provided to the reader.”
The disclosure mirrors similar recent efforts made by pension managers like California Public Employees’ Retirement System, California State Teachers’ Retirement System and New Jersey Division of Investment to provide a greater level of detail around the costs of their investment portfolios.
At the same meeting, Texas TRS Deputy CIO Ken Welch said the state’s legislature expressed concern about the disclosure of carried interest and other performance fees. “We’re doing what everybody else will be doing in the not too distant future,” he said.
“If you don’t include these performance fees, you look like you’re paying a lot less than somebody like us, who is including the performance fees,” Welch said, adding the variation has made it difficult to compare the costs of different institutions.
Teacher Retirement System of Texas valued its PE portfolio at $12.7 billion as of the end of its fiscal year on Aug. 31. The retirement system’s total portfolio had $60.5 billion under management.
Action Item: Teacher Retirement System of Texas: www.trs.texas.gov