CalPERS board kept in dark on TH Lee fee dispute: Jelincic

JJ Jelincic, a CalPERS director and outspoken critic of private equity, said the board should have been informed of a heated fee dispute that took place around year-end between pension staff and Thomas H. Lee Partners.

Board members first learned of the dispute between Real Desrochers, CalPERS private equity chief, and several TH Lee executives after an article on the subject was published by Buyouts on June 6.

“One of the things we’re having is constant discussion about fees to private equity, and if there’s an ongoing dispute and staff is taking an aggressive position, we ought to know about it,” Jelincic said in a recent interview with Buyouts.

He added: “We ought to be challenging the fees. We’re spending other peoples’ money.”

Jelincic’s desire for more information appears to be at odds with established practice at the pension fund. Spokesman Brad Pacheco said it is not unusual for staff to work with GPs on fee-related issues without informing the board.

“The staff makes the determination about what information needs to be brought to the board as part of our monthly meetings based on their professional opinion,” he said.

Board President Rob Feckner agreed, saying in a statement to Buyouts that he believed staff acted appropriately. “The board has directed staff to be tough on private equity fees and that’s what they did in this case.”

In emails dating from December and January, Desrochers accused TH Lee of charging portfolio companies in two older funds accelerated monitoring fees without adequately disclosing the practice to investors. He also said the firm did not disclose in advance its method of allocating fund expenses to general-partner-funded co-investment vehicles.

TH Lee executives responded in a letter that the firm did disclose these practices and fully complied with the limited-partnership agreements in the two funds.

Whether the board should have been informed of the dispute back in December joins a host of transparency-related questions raised by the issue. For example, Desrochers asked TH Lee executives to share its findings with other limited partners and with the Securities and Exchange Commission.

The firm did share the findings with the limited-partner advisory committees in Fund V and VI, and said in the letter it would share the information with the SEC. Matt Benson, a spokesman for TH Lee, declined to comment.

Another question: Should the dispute be made public? CalPERS declined an open-records request by Buyouts for copies of the Desrochers-TH Lee correspondence, citing exemptions to the law. Buyouts obtained copies through other sources.

Several sources said investment staffers at CalPERS and many other public pensions operate separately from the board and determine which issues to bring to board meetings. This is, in part, to protect investment staff from political pressure to direct pension money to preferred managers.

David Fann, president and chief executive officer of consulting firm TorreyCove Capital Partners, said boards generally stick to policy and strategy and don’t get involved in day-to-day details.

“Boards would generally not know the specific details of any fund and its terms, and disclosure to the board only happens if the dispute becomes a potential litigation or public, and the press writes about it,” Fann said.

That said, it is not unheard of for public pension board members to take a special interest in a particular topic. Said an investment consultant who works with public systems: “Boards have a tendency to meddle in the details that are not key to their fiduciary duties.”

Update: This story has been updated to provide additional information about TH Lee’s sharing of information.

Action Item: Check out the agenda for CalPERS investment committee meeting here: http://bit.ly/1Q1VPRw

Photo: JJ Jelincic photographed by Alastair Goldfisher for Buyouts Insider, 2015