CalSTRS to pay up to $1.2 mln to figure out cost of undisclosed fees, expenses

  • Project will capture underlying fees, costs of PE
  • CalSTRS will award $400k/year contract to outside vendor
  • “It’s definitely a manual process,” says CIO Ailman

The California State Teachers’ Retirement System will move forward with a project to uncover previously undisclosed costs related to its investment portfolio, including the fees private equity firms charge their funds’ underlying portfolio companies.

The cost? CalSTRS expects to pay $400,000 per year for up to three years for the project, which it will award to an outside vendor, likely an existing investment consultant or auditing contractor, Chief Investment Officer Chris Ailman said at the pension system’s February 3 meeting.

A member of CalSTRS’s investment staff will manage the project, which may evolve into a computer system that will allow the system to to track the costs on its own.

While the project aims to get a handle on investment costs across its entire portfolio, the bulk of the effort will likely go toward determining costs of private asset classes, including private equity, Ailman said.

“It’s definitely a manual process,” Ailman said. “This information is not stuff that’s reported to us directly. It’s stuff we’d have to go out and [obtain].”

Ailman said he hopes to present the information at CalSTRS’ July meeting in a closed session. In an email, spokesman Ricardo Duran said the information will be presented in open session in July if “all goes according to schedule.”

Ailman said CalSTRS has already obtained bids from two contractors, though one consultant declined to bid because “they said [the project] was unrealistic,” he said.

Many public pensions are struggling to find effective methods for monitoring the amount of carried interest and other fees their managers collect from funds and portfolio companies. CalSTRS’ sister pension, the California Public Employees’ Retirement Systemdisclosed its managers’ carried interest totals in November.

Likewise, the Los Angeles County Employees Retirement Association and State of Wisconsin Investment Board launched reviews of their private asset classes’ investment costs last year.

Currently, CalSTRS reports its private equity returns net of all fees, including carried interest, but is unable to determine how certain fees cut into its portfolio’s gross return. In a recommendation memo, Ailman stressed the need for this project by noting recent SEC findings that unveiled how certain firms can collect revenue from portfolio companies without discounting management fees paid by LPs.

The SEC in November fined Fenway Partners $10.2 million for using an external consulting firm, which was owned and operated by past and current Fenway executives, to reroute millions of dollars in fees from its portfolio companies.

Normally, fees charged to portfolio companies would offset the annual management fee Fenway charged LPs. However, because the consulting firm was not technically subject to Fenway funds’ partnership agreements, the firm’s executives reaped the benefit of the portfolio company fees without discounting the management fee, the SEC alleged.

CalSTRS is not a Fenway LP, but the pension is an LP in several vehicles managed by Blackstone Group and Kohlberg Kravis Roberts & Co, both of which were fined by the SEC for failing to properly disclose certain fees and expenses.

Fenway, KKR and Blackstone did not admit or deny any wrongdoing in paying fines to the SEC.

The SEC’s uncovering of improper disclosure of expenses led members of CalSTRS and the CalPERS investment committees to criticize the respective pensions’ staffs for failing to monitor carried interest and other fees. Both pensions became key supporters of the Institutional Limited Partners Association’s new reporting template, which is intended to help standardize how GPs disclose fees and expenses.

“As more limited partners begin to request this information, it is expected the turnaround time to collect this cost information will be reduced,” Ailman wrote in the recommendation memo. “Eventually, an industry standard reporting framework will be adopted which will provide an easier mechanism to capture and collect data electronically.”

On January 29, CalSTRS board member and State Controller Betty Yee wrote a letter asking the SEC to require GPs to disclose all fees and expenses. ILPA’s recently released template could provide the basis for mandatory and standardized reports, Yee wrote.

“It has been a considerable challenge for even the most sophisticated investors to negotiate the appropriate level of fee disclosures with all general partners,” Yee wrote.

CalSTRS, which manages $186.1 billion on behalf of California teachers, had a 9.2 percent allocation to private equity at year end, according to pension documents, 3.8 percentage points short of its target. The portfolio netted a 13.2 percent internal rate of return since inception as of September 30.

Action Item: For more on CalSTRS investment cost project, visit