Lacera has no process for validating fees, audit finds

  • $48 bln pension also lacks process for verifying fund audits
  • LACERA issued RFP for fee verification last year, seeking new staff
  • Pension paid $161 mln in investment management fees in FY 2014-2015

Los Angeles County Employees Associationhas “no process for validating private equity fees,” according to an April audit the pension system released.

Lacera, which valued its private equity portfolio at $4.3 billion as of June 30, also lacked processes to verify the findings of PE fund audits or annually reconcile its pro-rata share of a fund’s net asset value, according to the audit.

The Securities and Exchange Commission has been critical of external firms hired by private equity funds to conduct audits. In his “spreading sunshine” speech in 2014, former SEC official Andrew Bowden claimed there is “a mistaken belief that auditors will provide sufficient oversight to protect investors’ interests.”

“When we think about the private equity business model as a whole, without regard to any specific registrant, we see unique and inherent temptations and risks that arise from the ability to control portfolio companies, which are not generally mitigated, and may be exacerbated, by broadly worded disclosures and poor transparency,” Bowden said.

Meanwhile, a bill in the California Assembly would require state and local retirement systems to report more information about private equity fees and expenses.

Similarities to Kentucky

The issues uncovered by Lacera’s audit bear some similarities to those uncovered at Kentucky Retirement Systems last year. Kentucky recently assembled an internal investment operations team to review, process and clear future capital calls.

Last year, Lacera issued a request for proposals for a consultant to retroactively recalculate and verify its private equity fund investments, which would include an assessment of fees, expenses and carried interest payments.

In addition to the external consultant, Lacera staff proposed adding a finance analyst to its team “to provide fee verification on an ongoing basis,” according to a copy of its April meeting materials.

Lacera did not respond to several requests for comment.

Lacera paid some $161 million in investment-management fees during the 2014-2015 fiscal year, more than a quarter of which went to private equity fund managers, according to its annual report.

Private equity was its best performing asset class during the 2014-2015 fiscal year, netting a 13.2 percent return thanks to a favorable exit environment and high valuations in healthcare and technology.

Even so, the $48 billion pension still missed its target return by 0.6 percentage point.

Action Item: For a copy of the internal audit, visit