Washington treasurer: Fund terms need not be disclosed to public

Information about a general partner’s carried interest doesn’t belong in the state pension’s annual financial statement, according to James McIntire, Washington’s state treasurer, who gave a keynote address at the Buyouts Chicago conference on June 21.

The implication is that carried interest is a GP’s income, agreed upon by LP and GP in the fund contract, and not a fee that needs to be reported in public documents.

“It’s a partnership we enter into. … State pension systems bring in the money, private equity partners have the expertise,” McIntire said. “Carry doesn’t belong in my [Comprehensive Annual Financial Report]. It’s my partner’s income.”

Commenting on the recent push for more transparency around the costs of private equity, McIntire said information like carried interest, or fund terms and conditions, shouldn’t be public. But he said more transparency regarding these issues may be inevitable.

“Those terms and conditions are part of proprietary information … so I would be very concerned about what would get included in that, if you’re going to have to post that,” McIntire said. “I’d be less inclined to be supportive of that kind of transparency.”

However, “a day is coming when we’ll need to be providing transparency about fees and carried interest,” he said.

Washington is one of the oldest, and largest, private equity LPs in the business. It valued its private equity portfolio at $17.5 billion through March 31, Buyoutspreviously reported.

The system is a member of the Institutional Limited Partners Association. McIntire is the president of the National Association of State Treasurers, which endorsed ILPA’s new reporting template and encouraged GPs to use it.

State officials have been pressuring GPs to be more open about fees and expenses.

Twelve state treasurers and elected officials wrote a letter to the Securities and Exchange Commission in July 2015, asking the agency to push GPs to be more transparent with expenses.

The letter said that of the four types of private equity expenses — management fees, fund expenses, carried interest and portfolio-company charges — only management fees are regularly disclosed.

Other expenses are disclosed but are buried deep in annual financial statements and not reported directly to LPs on a quarterly basis, the letter said.

“This lack of clear and frequent reporting has resulted in an uneven approach to fee disclosure from private equity general partners to limited partners,” the letter said.

Ultimately, private equity fees and expenses matter to LPs because they make the asset class among the most expensive in an institutional investor’s portfolio. And these costs cut into performance.

Private equity had the highest gross returns in a new study of investment returns from more than 200 large U.S. pension funds from 1998 to 2014.

According to the study by CEM Benchmarking Inc, sponsored by the National Association of Real Estate Investment Trusts, private equity produced a gross return of 13.46 percent but a net return of 11.37 percent.

Action Item: CEM Benchmarking’s report: http://bit.ly/29q4aM5