Texas TRS tests program to audit GPs’ compliance with LPAs

  • TRS hires PwC to audit two of its partnerships at random
  • Pilot program could expand to other managers, depending on risk
  • Cost of the program has yet to be negotiated

Teacher Retirement System of Texas has hired consulting firm PricewaterhouseCoopers to audit two of its private equity partnerships.

The audits will assess the accuracy of fees charged to Texas TRS and the fund manager’s compliance with its limited partnership agreements, according to pension documents. It would also require the general partner to support how they’ve valued their fund’s underlying investments.

The audits will function as a pilot for an expanded auditing program that would require the $133.2 billion retirement system’s private equity GPs to provide documentation of fees charged their fund investors, spokeswoman Juliana Fernandez Helton told Buyouts. The partnerships selected for audit will be chosen at random.

The audit will require GPs to complete a questionnaire and provide documentation of fees assessed by their funds, according to Helton. Texas TRS will follow up with onsite interviews and a review of the documentation provided by firms.

“If the pilot extends to an ongoing program of audits, selection will be based on risk assessment criteria that has yet to be established,” Helton said in an email. The audit is expected to be completed by the end of the retirement system’s fiscal year, Aug. 31, 2017.

The cost of the audit has yet to be determined. Texas TRS and PricewaterhouseCoopers are still negotiating the accounting firm’s fee, “which will depend on their level of effort,” Helton said. The project will also require time and input from Texas TRS staff.

Several large public pensions have conducted similar reviews. State of Wisconsin Investment Board paid Ernst & Young $360,000 to review and recalculate its PE fees, according to board materials. In February, California State Teachers’ Retirement System estimated ongoing reviews of PE fees could run around $400,000 per year.

Private equity’s fee-and-expense practices came under fire in recent years amid SEC enforcement actions against several firms, including major asset management shops like Apollo Global ManagementBlackstone Group and Kohlberg Kravis Roberts. Each of those enforcement actions resulted in multimillion-dollar settlements. The firms did not admit or deny the SEC’s findings.

Apollo and KKR each manage $5 billion private markets separate accounts for Texas TRS, pension documents show. The retirement system has committed more than $2.5 billion to Blackstone since 2003.

SEC scrutiny of the industry fed into concerns that public pensions had failed to account for all the industry’s costs. In 2015, California Public Employees’ Retirement System was criticized by board members and elected officials for failing to track the amount of carried interest its private equity managers had taken as a profit share.

Texas TRS valued its PE portfolio at $15.9 billion as of Sept. 30. The  system held 11.9 percent of its assets in PE as of that date, just short of its 12 percent interim allocation target.

The portfolio generated a five-year return of 12.5 percent as of that date.

Action Item: For more information about Texas TRS, visit www.trs.texas.gov