- More than $26 mln budgeted for partnership fees
- Had an 8 percent allocation to PE as of June 30
- “Fees on the committed amount are the norm”
Although private equity made up just 8 percent of the $18.3 billion pension system’s market value as of June 30, fees associated with those assets account for more than 31 percent of the $84.2 million Los Angeles Fire and Police has budgeted for fees in the 2014-2015 fiscal year, according to a revised budget approved by its board in July.
That total does not take into account performance fees that will be collected by its private equity managers, Los Angeles Fire and Police Pensions Chief Investment Officer Tom Lopez told Buyouts in an email.
Private equity firms typically charge investors a management fee equal to 2 percent of whatever is committed to the fund, in addition to taking a 20 percent share of whatever return is generated by that fund’s investments. Investor backlash to the high costs associated with private equity funds prompted many firms to offset management fees with transaction, consulting or monitoring fees incurred by the fund’s underlying portfolio companies.
Other firms have limited management fees by applying them only to the amount of capital their fund has invested, rather than what has been committed. Lopez noted that most of the pension system’s commitments have gone to funds that charge management fees on committed capital.
“While there are a few private equity funds that only charge fees on invested capital, fees on the committed amount are the norm during the investment period of the fund,” he wrote.
The $26 million that Los Angeles Fire and Police has budgeted for private equity partnership fees includes $825,000 for funds that received commitments through the pension’s 1 percent allocation to commodities and energy strategies. The combined total is roughly $883,000 more than what Los Angeles Fire and Police budgeted for private equity partnership fees in the previous fiscal year.
Lopez wrote that the new budget accommodates a larger target allocation to private equity, which increased from 9 percent to 10 percent last year.
Los Angeles Fire and Police Pensions valued its portfolio at roughly $1.5 billion as of June 30. The pension is slightly underallocated, holding an 8 percent allocation on its 10 percent target, according to a June 30 investment report.
In June, Los Angeles Fire and Police Pensions closed commitments to funds managed by New MainStream Capital, Garrison Investment Group and Polaris Partners.
The private equity portfolio had netted a 10.3 percent internal rate of return and 1.42x return multiple as of June 30, 2013.