Four Investors Tout Fee Concessions From GPs

As state pension funds eye the yawning gap in their unfunded liabilities—about $1 trillion in all, according to the Pew Center on the States—at least four state funds have begun to wring fee concessions from their existing private equity contracts.

“We’re more in the driver’s seat” when it comes to fees, said Andy Pratt, a spokesman for the New Jersey Treasury. But “if you can demonstrate superlative performance, then we’re not as much in the driver’s seat,” he said.

The four state pension systems that have sought to wring discounts from their private equity contracts are the California Public Employees Retirement System, the California State Teachers Retirement System, the Oregon State Investment Council and the New Jersey Division of Investment.

Other state pension funds may also be pursuing fee concessions, but pension managers have tended to announce their efforts only after they win concessions, which they can then trumpet to lawmakers and pensioners.

The amounts of the discounts are not trivial. CalPERS, the nation’s largest pension fund with $228 billion in assets, said last week it had been able to negotiate $215 million in current and future fees from its existing contracts. The amount included, as Buyouts reported earlier, a $125 million concession from Apollo Management LP.

In the case of CalPERS, fee concessions went hand in hand with the pension fund’s recent ban on general partners using placement agents, a ban that was adopted in the wake of a recent fraud scandal allegedly involving a prominent placement agent. CalPERS’s public affairs chief, Brad Pacheco, said the $215 million in fee concessions represent, in large part, the money under existing contracts that placement agents would have earned.

Moreover, he said, a special review submitted to CalPERS’s board just concluded that there was about $100 million more in fee concessions that CalPERS should pursue, and that negotiations for those fee concessions were, in some cases, already underway.

For CalSTRS, the nation’s second largest pension with $146 billion in assets, the catalyst for pursuing fee concessions was the financial crisis. We did this “because of the hit we took to the overall portfolio,” said spokesman Ricardo Duran. Reducing fees was a key part of the CalSTRS’s 2009 business plan, whose theme was “Back to the Basics.”

Duran said CalSTRS was able to reduce the fees it paid to outside managers by 15 percent. In calendar year 2009, the fund spent $376 million in management fees to private equity firms.

New Jersey’s $71 billion pension system announced this month that it was able to wrest $40 million in fee concessions over the next five years. Andy Pratt, the New Jersey Treasury spokesman, said the financial crisis provided both the opportunity and the need to pursue fee concessions. “There were some services that were in higher demand a few years ago and are not in as high demand now,” he said.

At the $56 billion Oregon Public Employees Retirement Fund, the treasurer’s office boasted of saving at least $8 million by renegotiating contracts with six of its investment partners. James Sinks, a spokesman for the Oregon system, said “We always strive to negotiate the best deal possible given the existing market environment, which is currently more favorable to limited partners.”

The state has done very well with its private equity investments, earning a 16 percent annual return over the past 30 years. By pushing for bargains on fees, Oregon said it was getting the same services for less, with the savings going to retirees and taxpayers.

In 2009, Oregon released a set of principles that aimed to ensure that no more than 20 percent of profits were taken by general partners. The principles also sought to make sure that profits would only be paid to private equity managers after invested capital had been returned to the fund.

In many ways, the principles that Oregon laid out dovetail with those that are outlined by ILPA, the Institutional Limited Partner Association. All four pension funds are signatories to the ILPA principles, which seek above all to make sure that the interests of limited partners and general partners are aligned.