CalPERS skips out on LP defense of SEC private fund rules

There was one conspicuous absence in the defense issued by a group of limited partners, along with ILPA, of the SEC’s private funds rule.

Out of eleven large pension systems that signed on to the filing, known as a “friend of the court” brief, the largest was California’s massive teachers’ pension system, CalSTRS.

But one system not represented was CalPERS, the nation’s largest pension system. It’s not clear why CalPERS skipped out on the brief that included other public systems in Chicago, District of Columbia, Colorado, Florida, Fort Worth, Los Angeles, Louisiana, Missouri and Washington State.

A spokesperson for CalPERS declined to comment. CalPERS boasts one of the largest private equity portfolios in the industry, backing GPs as large as Blackstone and Apollo, as well as newer managers like Patient Square. It is generally considered a leading voice in the LP community and its moves are watched as bellwethers of things to come in private equity.

So its absence from the brief is curious, to say the least. The system published a letter in 2022 in support of the SEC’s proposed rules, especially around issues of quarterly disclosure of fees and expenses and holding managers to the same fiduciary standards as investors.

However, the system was not supportive of the idea of the SEC restricting or limiting LPs’ ability to enter side letters with GPs, which is characterized as “preferential treatment.” Under the finalized version of the rules, side letters aren’t banned, but side deals need to be disclosed to all LPs, making it easier for managers to potentially streamline the terms of funds.

“Advisers hold outsized control of information and influence over the fund formation process,” according to the filing. “As a result, despite their sophistication and best efforts, investors often face headwinds in negotiating for common, but critical governance terms, including consents and disclosures.”

“The private fund adviser rules make fund formation more fair and efficient because advisers and institutional investors will not need to spend time – or drive up legal fees – by haggling over terms that are basic common sense investor protections,” the brief, filed in December, said.

The group filed the brief in response to a lawsuit brought last year by private equity trade groups to block the SEC’s rules, which were adopted last year. The rules mandate, among other things: quarterly reporting on fees, performance and expenses; annual audits for each fund; the same access to information for every LP in a fund; fairness or valuation opinions on GP-led secondaries; and LP consent to charge the fund for investigations or examinations.

We’ll see where it all leads. The rules as published really did not represent an overly burdensome mandate on GPs (unlike how they were originally proposed). But still, they will require more back office-type activities, which mean more costs and resources for GPs.

And LPs will be watching.

As we continue to hear in conversations with LPs and GPs, fundraising remains an extraordinary challenge for most GPs, and in this market LPs are looking for any excuse to not make a commitment. There are enough options out there for LPs to find what they’re looking for, and those GPs that aren’t on board with what an LP is expecting around terms and conditions will likely find themselves taking the scenic route on the fundraising trail.