North Carolina goes transparent: discloses total carried interest

  • PE, VC portfolios cost pension $162.6 mln, counting carried interest
  • North Carolina among few US pensions to disclose carried interest amounts
  • CEM finds North Carolina’s costs low, compared to its peers

n an unusual move, North Carolina disclosed the total amount of carried interest its private equity general partners collected in 2015.

North Carolina’s roster of buyout managers that work with its public pension system earned $26.4 million from realized investments last year, according to a recent report released by the state’s investment advisory committee. Venture capital GPs collected an additional $10.6 million (see North Carolina 2015 fees chart).

The North Carolina Investment Advisory Committee, which advises Treasurer Janet Cowell on how to invest of the state’s pension assets, tapped CEM Benchmarking to conduct an annual review of the portfolio’s costs and returns. CEM included the information about performance-related compensation and carried interest in a report presented at the committee’s Sept. 21 meeting.

Only around 40 percent of CEM’s clients collect or calculate information about their GPs’ share of investment profits, commonly referred to as carried interest, according to Mike Heale, a principal at the consulting firm. That includes 33 Dutch pension clients required to do so by law, he said.

Most U.S. pensions do not track or publish data about their private equity manager’s share of investment profits, and many do not consider it an investment cost.

To some, carried interest represents capital that would otherwise go to a private equity fund’s limited partners, therefore making it a cost. Others view it as a simple profit-sharing arrangement that incentivizes alternative investment managers, aligning their interests with those of limited partners.

The distinction’s an important one, particularly for public pensions that must dedicate staff time to calculating each manager’s carried interest.

When the Kentucky Retirement Systems’ board instructed CIO David Peden to calculate carry as a cost, it shifted resources away from staff’s traditional investment activity. Reclassifying carry almost doubled the pension’s presumed costs year-over-year.

“Obviously there’s a tremendous amount of work that goes into it. We would prefer to not be spending staff time on such a project, we would prefer to spend time on investments looking forward. But we long ago lost that argument, in terms of whether carried interest is a fee or a revenue sharing,” Peden told Buyouts in an interview last year.

North Carolina provides this information with more specificity and transparency than most. Much like the California Public Employees’ Retirement System, North Carolina’s treasury department disclosed amounts individual managers collected in the form of management and incentive compensation last year.

That said, it’s unclear whether the retirement system views carried interest as a cost. Carried interest and other incentive compensation were excluded from CEM Benchmarking’s calculation of North Carolina’s total fees and expenses.

North Carolina Treasury spokesman Brad Young did not respond to requests for comment.

Other costs

CEM Benchmarking looked at a variety of costs incurred by North Carolina’s portfolio in its review, including a tally of carried interest and performance-related compensation collected by outside firms tasked with managing the pension system’s private equity, real estate and infrastructure holdings (see chart).

In addition to their share of carried interest, the pension’s buyout GPs also gobbled up $35.1 million in the form of annual management and other active base fees. Funds-of-funds charged roughly $22 million in the form of management fees and collected $800,000 as performance-related compensation. North Carolina’s co-investment holdings, which private equity firms typically offer on a no-fee, no-carry basis, cost a little more than $900,000 in 2015.

All told, North Carolina’s portfolio of private equity and venture capital assets cost the pension around $162.6 million, including carried interest. Without carry, the retirement system’s costs totaled $108 million.

North Carolina spends less money to manage its investment portfolio than comparably-sized public pensions, according to CEM Benchmark’s assessment. However, the portfolio’s five-year return of 6.7 percent net landed the pension in the bottom half of its peer group, which includes 14 U.S. public pension funds.

Action Item: For more information about North Carolina’s pension system, visit