At Indiana pension, PE fee offsets lead to $15.8 mln surplus

Indiana Public Retirement System shaved nearly $16 million off its annual budget for investment fees after general partners provided the pension with unexpected discounts.

In the fiscal year ended June 30, Indiana’s $25.5 billion public pension had expected to pay private equity firms $57.8 million of management fees but ultimately shelled out just $42 million.

Indiana also finished the fiscal year under budget for fees relating to its portfolios of absolute return and real estate assets. Across its total portfolio, the system paid $160.6 million for investment-management fees during the previous fiscal year, more than 14 percent below its projected costs (see Indiana Management Feeschart).

PE firms typically charge their limited partners an annual fee to manage their capital. The fee typically takes the form of a cash commitment that’s drawn down over the course of a fund’s investment period. In recent years, a growing number of general partners offset those management fees if they collected revenue from other sources, like advisory or monitoring fees from a fund’s underlying assets.

Forecasting the exact amount pensions owe their managers is a difficult task, all the more so given the variety and complexity of management-fee terms negotiated in limited-partnership agreements and side letters. That said, though Indiana likely welcomed the lower costs, it’s unclear why staff’s projections deviated so widely from the portfolio’s eventual costs.

The $57.8 million Indiana projected would have represented a 26 percent increase from the $46 million it paid in the fiscal year ended June 30, 2015. In the ensuing 12 months, its PE portfolio grew just 4.1 percent to $3.3 billion, according to retirement system documents.

Indiana Public Retirement System declined to disclose which of its fund managers contributed to the $15.8 million of unexpected offsets. A spokeswoman declined to provide additional information about fees and expenses, citing exemptions under the state’s open-records law. Bo Ramsey, the Indiana system’s head of private equity and deputy chief investment officer, declined to comment.

The Indiana system held 13.3 percent of its assets in PE as of June 30, above the 10 percent allocation it set for the asset class. Its holdings include stakes in flagship funds managed by some of the industry’s most prominent firms, including Apollo Global Management, Bain Capital, Oaktree Capital Management and Vista Equity Partners.

The portfolio generated an 11.1 percent internal rate of return since inception, falling short of the 13.2 percent IRR generated by its public market benchmark, the Russell 3000 index plus three percentage points.

Action Item: For more information about Indiana Public Retirement System, visit www.in.gov/inprs