CalPERS runs audit to see if GPs comply with fund terms

  • CalPERS hired FTI Consulting for PE compliance review
  • System reviews large GPs compliance with LPAs
  • Report shows compliance across the board

California Public Employees’ Retirement System hired a firm to audit its private equity program and determine whether certain general partners were complying with various aspects of their limited-partner agreements, according to two people with knowledge of the review.

The results of the audit found all the GPs included in the analysis were complying with the terms of their fund contracts, the people said. “The short version is … all of the [funds] that were part of [the review] were doing what they were supposed to be doing,” one of the people said.

Buyouts reviewed a draft of the report, compiled by FTI Consulting. It’s unclear whether the final version changed from the draft version. FTI declined to comment. The CalPERS board reviewed the work at its meeting in June in closed session.

The project took close to a year and cost more than $300,000, one of the people said.

According to the draft version, the GPs that were reviewed were Blackstone GroupApollo Global ManagementCarlyle GroupCerberus Capital Management and CVC Capital Partners. Each firm declined to comment except for Blackstone, which did not respond to a request for comment.

The review “represents one of many efforts by CalPERS to bring greater transparency and understanding of fees paid to general partners in our private equity program,” said spokesman Brad Pacheco.

“We are committed to reducing costs and complexity in our investment portfolio, and we will be using the work toward this effort.”

Pacheco declined to comment further.

The review focused on several areas including fees and expenses. For example, the review found that each firm complied with the management fee and offset calculation in their LPAs; did not charge fees that caused any conflicts of interest; did not collect fees on exited investments; and did not benefit from offsets that exceeded management fees.

The review also found each firm provided details for portfolio-company fees — including salary and travel — other than for fees that were offset, the draft report said. Those fees complied with the terms of each firm’s LPA.

The review also looked at the results of Securities and Exchange Commission exams and mock exams and related changes; whether distributions followed the waterfall scheme in the limited-partner agreement; cross-fund investment policies; valuation processes; compliance with CalPERS’s side letter and placement-agent disclosure policies; financial-reporting processes and any recent material changes to each area of focus.

Several large public systems have made efforts to better understand the costs of their PE programs. CalPERS last year tallied the carried interest it paid out to GPs since the inception of its private equity program in 1990. The pension system discovered that it paid $3.4 billion in carry on $24.2 billion in realized net profits during that time.

Action Item: CalPERS’s private equity program: