The California Public Employees’ Retirement System, the biggest U.S. public pension fund, hopes to win fee cuts from other private equity firms following a deal it struck with Apollo Management to slice up to $125 million off fees, its Chief Investment Officer said on April 26.
Pension funds and other investors have been able to wield increasing pressure on private equity funds to cut fees since the financial meltdown, as buyout firms have found it harder to raise fresh cash.
“It just drives me nuts when I think about managers who are generating profits off the management fees,” said Joseph Dear of CalPERS, the $213 billion retirement system. “That’s why this drive to get better terms is so fundamentally important.”
“There’s never been a better time (for investors) to press their case and if we don’t take advantage it’s a missed opportunity,” said Dear, speaking at a panel at the Milken Institute Global Conference.
Private equity firms typically make money from carried interest, the slice of the profit they take from investing capital. They also generally charge management fees of 1 percent to 2 percent.
Investors frequently argue that funds should only be incentivized by the carried interest profits, not by making money from the management fee.
Apollo Management last week agreed to a deal with CalPERS to reduce fees for the pension fund giant—not for traditional private equity investments, but for funds that the buyout shop manages solely for CalPERS.
“That’s a significant step forward and we intend to take that to our other significant private equity relationships,” said Dear.
Dear in March met some executives from the private equity industry at a closed door meeting organized by the Institutional Limited Partners Association (ILPA), which represents investors.
ILPA has put forward a number of principles that it wants general partners—the private equity executives that invest their money—to follow.
Those include that funds and investors’ interests should be aligned, fees should not be excessive and that changes in tax law should not be passed on to investors in a fund, according to the ILPA Web site.
“My hope is that ILPA takes those [principles] and have a third party rate all the private equity managers on compliance with those principles,” Dear said.
That will help institutionalize private equity as an asset class and drive down the cost towards the point where the investor and the private equity firm make money at the same time, he said.