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CalSTRS board calls for exploration of carried interest reporting

  • Staff can currently estimate carried interest with “reasonable level of accuracy”
  • Staff to examine industry’s current standards for carry reporting
  • Standards vary manager to manager, and among LPs

The California State Teachers’ Retirement System’s investment committee directed its staff to identify strategies that will bolster the system’s ability to track private equity fees and expenses.

“Currently, staff can estimate with a reasonable level of accuracy the amount of carried interest its investment partners receive, but as a board we want more information regarding this issue to follow up on the recent public debate,” said investment committee Chair Sharon Hendricks in a prepared statement at CalSTRS September 3 meeting.

Staff will examine the industry’s current standards for reporting and tracking carried interest, which institutions often report as a performance fee, Hendricks added. Those standards can vary from manager to manager, and LPs differ in how they collect and process information detailing carry, fees and expenses, according to a July 21 letter several state treasurers sent to the SEC.

“States that voluntarily disclose more comprehensive accounts of total fees and expenses are put at a disadvantage in state-to-state comparison. We believe increased disclosure transparency will provide limited partners with a stronger negotiating position, ultimately resulting in more efficient investment options,” the treasurers wrote in the letter.

State Street-Private Edge handles CalSTRS’ accounting, which can track all cash flows into and out of the retirement system’s $18.8 billion private equity portfolio, according to a recent memo. While the Private Edge system can track capital calls, as well as whatever fees and expenses CalSTRS pays, it has a harder time tracking transaction and portfolio monitoring fees paid by funds’ underlying portfolio companies.

“Partnership structures are often quite complex and because the disclosure of these items by general partners is not standardized, it is more challenging for limited partners to track these items than would otherwise be the case,” according to a CalSTRS memo.

The staff memo went on to express support for the goals stated in the treasurers’ letter, which calls for a standardization of private equity reporting practices.

“Staff will continue to work individually and as a member of various industry groups (including the Institutional Limited Partners Association or ‘ILPA’) to improve industry reporting and disclosure practices,” the memo said.

CalSTRS had a 9.8 allocation to private equity as of July 31, according to its website. The $191 billion retirement system is approximately 3 percentage points short of its target allocation to the asset class.