Arizona projects $72.5 mln in total PE fees for FY 2015

  • $34.5 bln retirement system to pay $39.2 mln in mgmt fees
  • Arizona projects another $33.3 million in carry, incentive fees
  • Retirement system has a 7 pct allocation to PE

The $34.5 billion retirement system also expects to pay another $33.3 million in other fees related to its private equity portfolio, a total that includes performance incentive fees and carried interest.

The Arizona State Retirement System had committed $3.4 billion to private equity funds as of December 31, according to a private equity program review published in April. A second-quarter investment report valued the portfolio at approximately $2.1 billion as of July 31. Combined, the $72.5 million of fees Arizona will pay to private equity managers during the 2015 fiscal year equate to roughly 2.1 percent of its total commitments since inception, or 3.5 percent of the portfolio’s market value.

Private equity firms typically charge investors an annual management fee equal to 2 percent of pledged or committed capital. General partners also take a 20 percent share of any returns generated by the funds’ investments in the form of carried interest. While “two and 20” is often cited as an industry standard, many firms have moved away from the traditional fee model in recent years.

It is unclear how many of the 72 fund commitments Arizona had made as of December 31 adhere to the two-and-20 model. A spokesperson for the retirement system had not responded to requests for comment as of press time.

Arizona had allocated 6.17 percent of its assets to private equity as of July 31, slightly under its 7 percent target.

In August, the Arizona State Retirement System disclosed a $40 million commitment to FFL Capital Partners IV, which is targeting $1.5 billion for growth-oriented investments in middle market companies. The commitment is consistent with a strategy outlined in an August report from Arizona’s Chief Investment Officer Gary Dokes indicating that the retirement system will focus future commitments on U.S middle market buyout firms with strong operational capabilities, while reducing its emphasis on large buyouts.

Arizona’s private market investment team is led by Karl Polen, while Eric Glass is the portfolio manager in charge of private equity and real estate, according to the report.