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CalSTRS staff backs treasurers’ letter to SEC

  • In memo, staff “supports the goals” of state treasurers
  • Staff pledges to work individually and with ILPA to improve reporting
  • CalSTRS commits $2.4 bln to asset class in first half

The $191.3 billion California State Teachers’ Retirement System (CalSTRS) threw its support behind a July 21 letter signed by 13 state and local treasurers and comptrollers calling for the SEC to standardize reporting of private equity fees and expenses.

In a staff memo included in its September 2 meeting materials, CalSTRS said it “supports the goals of the thirteen state treasurers and 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.”

Many retirement boards have pushed harder on disclosure of fees and expenses after the SEC began examining firms registered with the agency. The letter’s signatories include CalSTRS board members and California State Treasurer John Chiang, who is also a member of the California Public Employees’ Retirement System’s board. Public officials whose offices oversee pensions in New York, North Carolina and Virginia also signed the letter.

The treasurers released the letter shortly after CalPERS disclosed that it had not tracked the amount of carried interest its general partners had taken out of its distributions. With roughly $29 billion in private equity assets, CalPERS is considered among the most important private equity LPs. Several of its board members, including Chiang, publicly criticized the institution’s standards following the disclosure.

In the September 2 memo, CalSTRS said its reporting methodology follows Generally Accepted Accounting Principles, but does not track certain transaction and portfolio monitoring fees.

“Because 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 and monitor these items than would otherwise be the case,” CalSTRS wrote.

A CalSTRS spokesman did not respond to requests for comment.

Exposure and support

CalSTRS values its private equity portfolio at approximately $20.2 billion and ranks among the largest public pension LPs in the industry. Its portfolio includes a $332 million commitment to Kohlberg Kravis Roberts & Co’s 2006 flagship fund, which became the subject of an SEC enforcement action after the regulator said it found the firm misallocated co-investors’ broken deal expenses to the $17.6 billion vehicle’s LPs. KKR settled the matter for approximately $30 million in June without admitting or denying the SEC’s findings.

CalSTRS staff has voiced support for the SEC’s examination of the private equity industry in the past. Earlier this year, the retirement system released an investment plan containing language that framed the regulator’s oversight in a positive light.

“Provisions of the Dodd Frank Act pertaining to private equity are a positive development in the industry and the SEC’s efforts to provide increased oversight is also positive,” pension staff wrote.

Active year

CalSTRS committed more than $2.4 billion to private equity and venture capital during the first half of 2015, including more than $1 billion for buyout funds, according to retirement system documents.

A $488 million commitment to Blackstone Group’s latest flagship fund, a $17.5 billion vehicle that is expected to close later this year, contributed heavily to the retirement system’s pace during the first half.

CalSTRS committed approximately $2.3 billion to the asset class during the first half of 2014, though it reached that total through 28 fund commitments and co-investments, compared to just 20 during the first six months of 2015.

The commitment to Blackstone Capital Partners VII is CalSTRS’ largest allocation to a Blackstone buyout fund since it committed more than $1.7 billion to Fund V in 2005, according to pension documents.

In addition to its commitments to buyout funds, CalSTRS also allocated $580 million to expansion capital vehicles (minority investments) managed by firms such as EnCap Investors, TA Associates and TPG. CalSTRS’ $2.6 billion portfolio of expansion capital funds has been the top performing sub-asset class within the retirement system’s portfolio, netting a 21.4 percent internal rate of return since inception, according to pension documents.

The pension remains an active co-investor, too, committing approximately $173 million across three co-investment vehicles during the first half.

CalSTRS’ private equity portfolio has delivered a 13.3 percent return since inception.