- PEARS could help track unrealized carry
- Expect rollout in July
- Most GPs cooperating with demand for information on fees, carry
The new accounting system, called Private Equity Accounting and Reporting Solution (PEARS), will replace a manual reporting process – collected through spreadsheets and other paper-based systems. The antiquated process is set to be replaced with an integrated IT system developed by Capital Analytics and eFront, CalPERS spokesman Joe DeAnda said in an email.
While the rollout of PEARS should improve CalPERS’ ability to process the information it receives from general partners, its success will depend on the quantity and quality of information CalPERS can extract from its managers, CalPERS Chief Operating Investment Officer Wylie Tollette said during CalPERS’ meeting in May.
“To the extent we can get adequate disclosure of those fees … that is really the key issue,” Tollette said. “[PEARS] provides the vessel. We still need the information to put into the vessel.”
While costs associated with the retirement system’s portfolio declined over the last four years, CalPERS cannot track private equity’s carried interest investment costs the same way it monitors real estate and real asset portfolio costs, Tollette said during the board’s April meeting.
Most asset classes collect “incentive fees” throughout the life of the fund, DeAnda said. “[With private equity] we don’t know the final number until an investment is closed out.”
Specifically, tracking so-called accrued carried interest is problematic. Accured carry represents the total amount LPs would expect to pay the GP if all of a fund’s investments were exited at once. Accrued carry includes realized, but undistributed, carry plus unrealized carry, which changes as valuations fluctuate. Typically GPs do not include accrued carry as a line item in their distribution notices, which makes it difficult to determine the true cost of an LP’s private equity portfolio.
The streamlining of information would help CalPERS track unrealized carry over the life of the fund, allowing the pension to develop a better understanding of performance or incentive fees collected by its private equity managers, according to Tollette’s comments in April.
“Profit sharing in the private equity market, in fact the whole private equity industry, is embedded in the return,” Tollette said at the April meeting. “It’s not explicitly disclosed or accounted for. We can’t track it today. That’s not just a CalPERS issue, that’s an industry issue and we’re trying to put in place the tools to disclose and understand what they are.”
Tracking the untrackable
According to DeAnda, all of CalPERS’ current contracts with general partners include provisions requiring the GP to provide the necessary information relevant to PEARS. Most of the retirement system’s legacy investments have agreed to provide similar information.
CalPERS’ plan is consistent with growing demand from LPs for information from managers. LPs not only need to ask for and obtain information from GPs, they also need systems in place to manage that data effectively, said Jennifer Choi of the Institutional Limited Partners Association.
“People have really been taking a much more active approach to try to discover from their managers as much information as they can,” Choi said. “It really does feel like there’s a groundswell within the industry to crack this nut and to understand the total costs related to a private equity investment program.”
LP consultant CEM Benchmarking’s Mike Heale said recently that many LPs want to know the accrued carry that managers generate over a given time period – typically a quarter or a year.
“It’s work to extract [that information] from some of the partnership agreements,” Heale said, commenting generally about LPs he has studied. “There is considerable variation in the level of detail and transparency of reporting. You’ve got these contracts involving large amounts of money, you should be able to make sure you’re paying the right amounts.”