San Diego has tough time reducing PE fees in strong fundraising market

  • Why is this important: San Diego pension has had tougher time reducing fees from PE than those of other asset classes
  • AUM: $12.5 bln
  • Allocation to PE 6.6 pct against 8 pct target
  • Contact: Mary Montgomery at +1 619-515-6814 or

San Diego County Employees Retirement Association is looking for ways to bargain down its private equity management fees, saying it hasn’t had as much success in that area as it has had with other asset classes.

Over the past three years the $12.5 billion retirement system has shifted away from fixed fees and toward incentives fees across asset classes, hoping to gain better alignment with managers.

The effort has largely succeeded, SDCERA board members said at a recent meeting. The system would have paid $47 million more than the $85 million in fees it paid in 2018 if it hadn’t adopted a new policy on fees, a recent staff report shows.

The savings come in part from negotiating fixed management fees in exchange for higher incentive fees, and in part from moving to low-cost, passive investments in public markets, the report says.

But PE, because of sharp LP demand and long-dated commitments that pre-date the fee-overhaul effort, has lagged in the cost-savings department.

“On private markets, we’ve worked to get better alignment and find long-term strategic partners, but that will be more difficult to get the fixed fees down,” CIO Stephen Sexauer said at SDCERA’s December meeting.

“There’s a trillion dollars out there, still giving them money at full fee,”  he said, referring to a common estimate for uncalled capital held in PE funds.

SDCERA’s focus on fee alignment has also contributed to a slower commitment pace for private equity, something Sexauer mentioned in past meetings.

SDCERA is below its 8 percent target for PE, with 6.6 percent currently allocated. The 1.4 percentage point difference is the largest underweighting of any asset class in SDCERA’s portfolio.

“We have not been funding private equity at the same rate that the distributions have been coming in, so we’re a little bit under in private equity and real assets,” Sexauer said.

Overall, SDCERA reported success in overhauling its fees. It paid an average 107 basis points in fees across its entire portfolio in 2014 and 2015, then got the number down to around 70 basis points from 2016 to 2018.

But private assets account for 21 percent of SDCERA’s portfolio and 72 percent of fees paid. PE in particular accounted for $827 million in assets and $30 million in 2018 fees.

The fees have been worth it for private equity, which added $48.9 million in alpha over a public market equivalent benchmark, after fees, according to SDCERA.

Its private equity managers were paid $19.4 million in incentive fees and $10.7 million in fixed management fees in 2018.

SDCERA has also succeeded in emphasizing incentive fees in its private-markets contracts.

From 2016 to 2018, it reduced the fixed-fee portion of fees paid to $25.9 million, or 21 basis points, from $31.6 million, or 31 basis points. At the same time, incentive fees the portfolio paid rose to $32.3 million, or 26 basis points, in 2018 from $12.3 million, or 12 basis points, in 2016.

SDCERA is happy to pay higher incentive fees if it brings better performance and alignment of interest, Sexauer said. “These are really capable firms with good people, so we want to build strong partnerships with them,” he said.

SDCERA board’s investment consultant, Aon Hewitt, said the fee overhaul has been more aggressive and successful than similar efforts at other public pensions.

“There is a general trend in this industry for some fee compression, especially in the traditional [public markets] space,” Aon’s Michael Comstock said at the meeting.

Action Item: Read SDCERA’s fee report here