Private Equity Industry Sees Red Over CalPERS’ X-Files –

The California Public Employees’ Retirement System (CalPERS) has made headlines recently because of published private equity fund performance reports – dating back to 1990 – made readily available on its Web site ( While the information has been posted on the site since October 2000, hardly anyone noticed until now.

The report lists all private equity partnerships in which the $158 billion pension fund has invested and includes details such as the date of the initial capital call, capital contributed, actual capital committed, total value multiple and the internal rates of return and losses to date. The funds are categorized ranging from the dubious “Too Early to be Meaningful,” “Below Expectations/With Concerns,” and “Below Expectations,” to the more flattering “As Expected” and “Exceeds Expectations.”

Buyouts recently interviewed a handful of private equity professionals to discuss the validity of the report, its impact, and the possibility of the private equity industry becoming more transparent.

The Players

Robert Fischer, Partner, Wold, Block, Schorr and Solis-Cohen LLP

Janet Kruzel, Alternative Investment Adviser, Kansas Public Employees Retirement System

Christian Oberbeck, Managing Director, Saratoga Partners

Glenn Oken, General Partner, FCP Investors

Brad Pacheco, CalPERS spokesman

John Erickson, Chief Financial Officer, American Capital Strategies

Buyouts: Why did CalPERS decide to post this report on online?

Brad Pacheco: We made a decision almost a year ago to put our agenda items to our board on our Web site. It was an administrative function because I get calls all the time for agenda items and it’s just easier for people to get it themselves.

This is a report we’ve been giving to our board for years. It’s a quarterly report on the status of what our private equity portfolio is doing. It’s kind of new that we’re putting it on our Web site, but if you were on our mailing list for these agenda items you would have gotten the report in the mail.

We want our process to be open here. Most of the items that go to our board of administration on a monthly basis are open session meetings to the public. There are investment decision items we take to our board in closed session where the information itself could impact the outcome of the investment.

Buyouts: Looking in from the outside, how does this benefit CalPERS?

Christian Oberbeck: They’re subject to a lot of public scrutiny as a public entity, and they’ve been getting inquiries as to what’s behind their portfolio, because there have been some hits and there are probably more coming. Disclosure helps matters, because if you don’t disclose things then people imagine things being worse than they really are when things are going badly. This is something that is overdue.

Robert Fischer: CalPERS is doing it more for its internal politics than it is helping the industry. I find that, like Regulation FD (Fair Disclosure), this is probably going to create more problems than it will solve.

Buyouts: Is CalPERS breaching any confidentiality agreements with its GPs?

Fischer: I doubt that there are any grounds here for legal actions. This is freedom of expression protected by the First Amendment and 97 other things. The report is not slanderous and not intended to be malicious. It’s just an opinion and no more actionable than writing an article in the Op-Ed page in the New York Times.

Confidentiality agreements vary from LP to LP and sometimes the confidentiality will apply only to the financial data with respect to transactions. Buy I don’t see where that’s going to be a major factor.

Oberbeck: CalPERS published exactly what it had and no more or no less. Is it spun the most favorable way for the GPs? Probably not. But is it CalPERS’ job to do PR for the GPs? All I’m saying is that it is a fact of life. Anytime one interfaces with a public entity you’re going to be exposed like that.

This is like a glimpse behind the curtain like in the The Wizard of Oz. By and large, the general reaction has been that these firms don’t look as good as people thought they did.

Pacheco: We’re going to take a closer look at what agreements we have with our GPs to make sure the quarterly performance report is acceptable. It’s a matter of addressing their concerns and we don’t want to do anything that’s going to impact their business needs and what they’re trying to carry out because that could impact our investment.

Buyouts: Are there issues that this report, or one like it, might fail to address?

Glenn Oken: It would be interesting to see if CalPERS intends to put additional information in its report to accurately reflect a risk-adjusted return performance. Someone may be posting very strong results for one fund, but if the detail is not provided as to what risks were undertaken to get there, then I’d be very curious to know what makes up the report. Timing and the risk-adjusted factor is hugely important, and I hope they will not be ignored by such a venerable institution.

Oberbeck: There’s a lot of art in how you value a private equity portfolio. Often what is reported is not necessarily reflective of underlying value because a lot of times you carry existing investments at cost, and so you may have investments in excess of cost.

Fischer: Any comparisons of the performances by the funds that have been in existence for two years and funds that have been in existence for eight years would be irrelevant. If the performance is based in some measure upon unrealized gains and losses, then I think it is quite fictional because that means somebody sat down in a room without windows and determined that its value and the interest that it had with a particular transaction that’s not yet been realized is worth twice as much as what the investment was.

I was on the board for 20 years of an SBIC and the board had to evaluate its realized and unrealized investments every year. So [every year] we went into a room, closed the door, turned out the lights, and threw darts.

Finally, if it is based entirely on measuring realized gains and if the publication of this data is to have an impact on the world at large, then I think it may have an effect upon the governance of the venture capital organization who will sell or do something to affect their performance rating; like when mutual funds gerrymander their portfolios at the end of the reporting period.

In this case, the wisdom and integrity of the management team is a very difficult thing to measure in a physical way, so I don’t like the idea of a public report like this at all.

Buyouts: What conclusions, if any, have limited partners drawn from the report?

Janet Kruzel: We run IRRs on each of our own funds and don’t usually look at what anybody else is doing other than to look at the benchmarks. It’s interesting to see what other people are doing, but that isn’t how I gauge my funds’ performance.

There are so many variables that can impact what their experiences are compared to what my experience is, such as the funds that they’re in, which close they came in at, and did they buy it in the secondary market. Besides performance, I’m also looking at diversification for my portfolio when I pick funds, so I may not have the same expectations of a particular fund that someone else may.

Buyouts: What are your opinions on transparency in the private equity industry?

Oken: When we were raising our second fund we talked about accuracy and uniformity in the way that partners report their results. The challenge has always been to find some uniform way of looking at returns. It seems like it would be in black and white, yet there’s still room for the industry to reach some kind of uniformity. So I think more transparency could be wonderful.

Kruzel: I don’t think we need to try and create the same transparency as there is in the public market because that is not feasible. Part of the reason that this is such an inefficient market is because information is selectively provided. Do I pay for that information when I invest in partnerships? Maybe, but do I want to give it to anybody else? Maybe not. I think this is part of the game we’re in. I understand where institutions are required to provide a certain amount of information. But if we had to provide too much information to the public, then this is an arena we can’t play in. If we want to deal in the publicly held securities, then we’ll go into the publicly held securities market.

John Erickson: As a publicly traded buyout fund we are required to disclose our performance, and we’re used to calculating our returns for our shareholders as well as mark-to-market our portfolio every quarter. We really don’t have an issue with that approach because we feel we really need to keep our investors informed. Our view is, to get the lowest cost to capital and to be fair to investors, there should be a lot of transparency in GPs’ portfolios. You should tell investors what’s going on, and ultimately you should be measured by your performance.

Oberbeck: It’s a significant trend and you have to go with these trends. Generally speaking, it’s not good business to fight the inevitable. There’s a mystique around alternatives, and I think this is the beginning of a straight-up analytical approach to alternatives as opposed to the “black box” approach.

When you have hundreds of billions of dollars invested in a sector by public and private entities, individuals, Regulation D investors, people are going to want to know where the money is because of the sheer size of the investment. They’re going to ask, Why do we have billions over here and it’s a secret, and then we have the stock market where the SEC is disclosing everything? Why should we have more information on General Motors’ stock holdings than we do on their entire private equity portfolio? How do we know they’re making the correct decisions?’ And when you have venture capital crashing and corporate buyouts with very mixed performances around the industry, then people are going to want to know what’s happening.

A lot of corners have been cut with a lot of fast and loose actions on the part of investors. There’s going to be a reckoning, and this is just the beginning of some of that inquiry.