Pennsylvania pensions push back on claims of underreported PE fees

  • Why this is important: Public pension funds are increasingly facing pressure for transparency in private equity manager fees

Pennsylvania Public School Employees’ Retirement System and Pennsylvania State Employees’ Retirement System may have paid almost three times the reported fees to their private equity general partners.

The two pension systems paid almost $6 billion in PE fees in the past 10 years, with only $2.2 billion reported, said Ludovic Phalippou, professor of finance at Oxford University.

The systems had reported only management fees, not other costs, including carried interest, Phalippou said.

Phalippou was speaking at the Public Pension Management and Asset Investment Review Commission informational hearing in Harrisburg, convened Sept. 20 by Pennsylvania state Rep. Mike Tobash and Treasurer Joe Torsella.

Paying $6 billion for an 11 percent return with an 8 percent preferred return seems unreasonable, Phalippou said at the meeting.

“We heard for the first time today an estimate that billions of dollars have been paid to Wall Street money managers, but have not been disclosed to the Pennsylvania beneficiaries that rely on our pension system to make ends meet,” Torsella said in a press release.

However, the two pension systems pushed back against the claims.

“There is no consensus on reported carried interest as a fee. Phalippou’s opinion is that carried interest is a fee and testified to that effect,” said Evelyn Tatkovski Williams, press secretary for the public school employees’ pension.

However, PSERS had begun to compile carried-interest data and would be presenting the results at its October meeting.

This was part of the transparency-related projects PSERS’s investment professionals have been working on for the past year and involved hundreds of staff hours, Williams said.

The state employees’ pension published all manager investment fees and expenses, including fees netted from distributions rather than billed directly, said Pamela Hile, press secretary for PA SERS.

In addition, both pension systems adopted the Institutional Limited Partners Association fee-disclosure template, which reflected their strong commitment to increase transparency, the spokeswomen said.

PA SERS also pushed back against comments by Ashby Monk, executive director of Stanford University Global Projects Center and co-founder of Novarca North America, and Phalippou who said they had not received relevant documents despite several requests to the pension systems.

Monk earlier this year was retained by the review commission to help review Pennsylvania’s pension funds and identify $1.5 billion in cost savings for each pension fund, Buyouts reported.

“Contrary to comments, in fact we have cooperated with the Commission and Treasurer requests for information,” Williams said.

While redacted copies of contracts were mentioned, the details were not clarified before the commission, she said.

Of the 20 private equity contracts requested by the pension system, 17 were provided in entirety. Only the names of other LPs and portfolio company names were redacted in those reports.

Certain information was redacted, complying with the law to protect the value of the system’s investments, Williams said.

Of the three contracts not provided, two were so old that PSERS had no documents because of its record-retention schedule, and one investment never occurred, Williams said.

The carried interest and fiscal year 2018 investment performance reports were not ready at the time of the request, and would be made available at the October meeting, she said.

Performance was also an issue brought up at the meeting. Data seemed to suggest the two pension systems underperformed their peer group, Monk said.

PSERS returned 3.49 percent over three years, 5.47 percent over five years and 2.8 percent over 10 years, he said.

PA SERS returned 5.1 percent over three years, 8.1 percent over five years and 5.3 percent over 10 years, Monk said.

Earlier this month, PA SERS approved $175 million in fresh commitments, appearing to defy the governor’s wishes for the state’s two public pension funds to halt high-management-fee investments while the committee studied the costs of the system’s investment programs, Buyouts reported.

Correction: A prior version of this report incorrectly gave Ludovic Phalippou’s title as an assistant professor. He is a full professor. The report has been updated. 

Action Item: Read more on PA SERS’s fee disclosures here