The California Public Employees’ Retirement System board has been in discussions about the best way to benchmark performance of its private equity portfolio.
One of the benchmarking options being considered, according to a public agenda of the board meeting in January, is a list of the most desired terms and conditions in private equity funds. Not only would a fund be measured against a performance benchmark, but also a terms-and-conditions benchmark. I’m a huge fan of this idea.
To be clear, I have no idea if CalPERS is serious about this or if the idea went any further than just a board discussion. CalPERS spokesman Joe DeAnda told my colleague Sam Sutton the hypothetical benchmark could detail a list of ideal terms and conditions that would allow the pension to see “how actual terms and conditions of our investments measure up.”
This goes back to something CalPERS board member and noted gadfly J.J. Jelincicproposed: He wants the system to publicly declare what terms it will accept from managers — to set limits on what it will pay, the types of services and fees it will pay for, and the terms it will reject. Jelincic wants to everyone to know where the system stands.
“I’m not sure why we would want to do business with somebody who won’t tell us up front: ‘These are the fees we’re going to charge you,’” Jelincic said at a CalPERS board meeting in November. “If we’re leaders, we need to step out and say: ‘These are our standards.’”
CalPERS pushed back against Jelincic’s proposal out of fear of losing access to funds. “Publicly broadcasting our terms and conditions would negatively impact our negotiating ability, and would lessen what bargaining leverage we currently have in the private equity market place,” DeAnda told Buyouts in a prior interview.
Maybe that’s true. The system can’t lock itself into a box so it has no flexibility. For the good of retirees, the system should have as much flexibility as possible when considering commitments to private equity funds.
That doesn’t mean, however, that it can’t set standards for what is acceptable in its private equity program. CalPERS has been one of the leaders in the LP community in bringing down fees and pushing GPs into friendlier terms. Why not add a terms benchmark that would allow the system to differentiate between firms that are good performers, but terrible term setters, from those who perform well and also happen to be LP friendly?
Meanwhile, judging a GP’s LP friendliness, especially as it comes to transparency, may have just gotten a little easier. The Institutional Limited Partners Association in late January published its reporting template for fees, expenses, offsets and carried interest. This would give LPs a much fuller view of the full cost of private equity.
Cost has been a major concern of LPs like CalPERS for a long time and part of that has to do with many LPs’ inability to understand the full cost of their PE programs. Many systems never tracked how much carried interest they paid out to GPs over the years.
These steps are all going in the right direction because full transparency, friendly terms and well informed LPs can only serve to make the industry stronger.