CalPERS dispute with TH Lee shows why transparency matters in private equity

Our cover story gives us a great example of why private equity limited-partner agreements, at the very least headline terms and conditions, should be public.

I reported a previously undisclosed dispute between California Public Employees’ Retirement System and Thomas H. Lee Partners over interpretation of language in the LPAs for Funds V and VI. The disagreement centers on accelerated monitoring fees and on GP co-investment vehicles not paying fund expenses.

CalPERS said it should be reimbursed for inadequate disclosure of these practices. TH Lee argued that it provided robust disclosure of these practices and complied with the LPAs.

It took six months for me to track down the back and forth between CalPERS and TH Lee, after hearing speculation about a heated disagreement last year. My process included several weeks of back and forth with CalPERS on open-records requests, which the system rejected in full.

I can’t help but wonder: Why does CalPERS take such efforts to reject these types of requests and keep this information locked up? Headline terms like fees and rates of carried interest are already made public by several large pension systems, which make their investment reports public.

All constituents — retirees, taxpayers, politicians, reporters — should have access to this type of information to better understand the investment program atAmerica’s largest pension system, especially when pensions are desperately underfunded and depend more and more on riskier assets classes like PE to meet their obligations.

As risk increases, so should transparency. CalPERS agreed to these contracts years ago, and only after SEC inquiries last year did the system realize the firm was accelerating monitoring-fee payments. TH Lee said CalPERS knew about these practices for many years, or should have, based on ongoing disclosure.

My belief is that everyone with an interest in this issue should be able to see it clearly, to determine whether disclosure is robust enough, whether firms are doing what they said they will do in the LPAs.

Why leave it to a few select people on the pensions’ PE investment teams — who very well may turn over halfway through a fund’s life, setting up new people with less knowledge of the thinking when agreements were signed — to manage a GP relationship?

Rather, let’s have a long, documented process of transparency: the initial contract, and subsequent financial reporting like capital calls and distributions; as well as any amendment changes to funds through its life. Keep a long history of a system’s relationship with a GP, right on the website, available for public view.

A source I spoke with expressed surprised that CalPERS and the system’s private equity chief, Real Desrochers, were pushing back so aggressively against one of its GPs. The perception in the mainstream media is that CalPERS and other private equity LPs are too passive, too deferential to GPs.

But this situation shows that CalPERS and Desrochers are willing to go to the mat over what they believe is right. It shows that the public perception of a compliant and passive LP is inaccurate and that behind closed doors the system and its PE head can be as aggressive as any GP.

This is stuff the public should know about. Stop locking it away.