PA PSERS releases its first carried-interest report; GPs earned 19.4 pct

  • Assets under management: $56.7 bln
  • Private markets allocation: 14.6 pct
  • Whom to contact: Evelyn Tatkovski Williams (
  • Why this is important: The LP followed through on its commitment to transparency in fee disclosures


Pennsylvania Public School Employees’ Retirement System issued its first carried-interest report and said its GPs earned 19.41 percent of investment profits as carry from the program’s 1985 inception through 2017.

The report, presented by Chief Investment Officer James Grossman at the Oct. 12 board meeting, reflects the agency’s continued execution on a 2017 plan to increase transparency.

All told, PA PSERS’s private-markets program GPs earned $3.22 billion of carried interest and the pension system earned $13.4 billion in net income since 1985, the report said.

The private-markets portfolio’s net asset value was $7.6 billion at Dec 31, 2017. Distributions were $32.19 billion and contributed capital — net of management fees and other fund-level expenses — was $26.44 billion since inception.

Net multiple

Accounting for all fees, the system earned a net multiple on contributed capital of 1.51x on its private-market investments since inception, the report said.

The review showed an “excellent alignment of interest” because every dollar made generated 80 cents for PA PSERS and 20 cents for GPs, the report said.

Generally, a pension system’s carry payments would converge to near 20 percent over time, a source said. Carry would not reach 20 percent unless all invested GPs exceeded their preferred returns, the source said.

The investment fees the pension system paid were criticized in a May 2017 audit by Eugene DePasquale, Auditor General of the Commonwealth of Pennsylvania. He noted in his report that PA PSERS did not report fund-level expenses or portfolio-company fees as investment expenses in its annual financial statements.

The Public Pension Management and Asset Investment Review Commission was formed this year to identify $1.5 billion in cost savings for the two Pennsylvania pension systems, PA PSERS and Pennsylvania State Employees’ Retirement SystemBuyouts previously reported.

At a September meeting of the commission, Ludovic Phalippou, professor of finance at Oxford University, suggested that the two systems may have paid three times the reported fees to their PE partners, Buyouts reported.

The two pension systems pushed back against the claims because there was no consensus on how carried interest should be reported, PA PSERS spokesperson Evelyn Williams told Buyouts at the time.

Carried interest can be considered a general partner’s profit share on the sale of capital assets or a performance fee for the manager.

The pension system considered carry the GPs’s profit shares, usually 20 percent of investment profits.

It was earned only after the limited partners received all the capital they contributed, including cost of investments, fees and partnership expenses, plus a preferred return on the contributed capital, the report said.

Other systems’ disclosures

Most pension systems do not disclose certain investment-related costs and offsets, in part because financial statements become less comparable with other plans, the report said.

But legislative and political pressures are compelling institutional investors to report these fees.

This year California State Teachers’ Retirement System, California Public Employees’ Retirement System, Los Angeles County Employees Retirement Association, Los Angeles City Employees’ Retirement Association and U.C. Board of Regents reported the fees and expenses PE firms charged for contracts entered into on or after Jan. 1, 2017. That’s because of disclosures required by California Assembly Bill 2833.

California Gov. Jerry Brown signed Assembly Bill 2833 into law in 2016. Investors had to “require alternative investment vehicles, as defined, to make specified disclosures regarding fees, expenses, and carried interest in connection with these vehicles and the underlying investments, as well as other specified information,” the bill said.

But the debut reports the various systems filed differed in scope and depth, reported Buyouts, a sister publication to Buyouts.

PA PSERS’s private-markets program, begun in 1985, includes private equity, PE co-investments, special situations and venture capital. PE makes up more than two-thirds (68.5 percent) of the $7.6 billion private-markets portfolio.

The PA PSERS annualized performance net of fees for private markets was 7.48 percent over 10 years, 10.03 percent over five years, 11.21 percent over three years and 16.26 percent over one year as of June 30, 2018.

Action Item: Read the pension system’s carried interest report here