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The California Public Employees’
Retirement System headquarters in Sacramento, in 2017.
Photo: Max Whittaker/Reuters
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A group of U.S. pensions and other institutions is pushing
private-equity firms to share more information on their fees and
investment returns, in a bid to address simmering frustration with the
industry’s disclosures.
The Institutional Limited Partners Association, a trade group that
counts the retirement plans of public workers in California and
Wisconsin as members, proposed this week new guidelines to standardize
financial reporting by private-equity firms, people familiar with the
matter said.
Public pension plans, university endowments and charitable foundations
have about doubled their investments in private-equity funds since
2018, according to Preqin, a company that collects data on private
funds. These institutions are among alternative investment firms’
biggest and most-loyal clients. North American private-equity funds
now manage some $4 trillion in assets.
Pensions have turned
to private equity to plug cash shortfalls for years,
tolerating weaker reporting on their investments compared with public
funds because most private funds generated higher returns. Now
investors want more transparency.
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Source: Preqin
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Private investment firms tend to vary how much they disclose to
clients based on how much they invest. The smaller the check, the less
information. Many small and midsize pensions are left out of the loop,
and even the big ones struggle to accurately compare performance of
fund managers.
“I’m a big believer that sunshine is the best disinfectant,”
said Scott Ramsower, head of private-equity funds at the Teachers
Retirement System of Texas, which manages $200 billion of savings for
its members. “We can then have much more detailed conversations with
our [private-equity] partners and hopefully be putting pressure on
them to really be thoughtful.”
Texas Teachers, the California Public Employees’ Retirement System and
the State of Wisconsin Investment Board are members of the
initiative’s steering committee. Representing the buyout industry on
the committee are Vista Equity Partners, Cerberus Capital Management
and Searchlight Capital Partners.
Some private-equity firms support the initiative, though its adoption
still faces an uphill battle, people familiar with the matter said.
More investors want to get into top private-equity funds than there is
room for them, giving private-equity firms greater leverage at the
negotiating table.
Private-equity assets managed for all types of investors have about
tripled over the past decade, but the fees collected by these firms
have risen sixfold, according to Preqin.
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Source: Preqin
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“Private-equity firms work every day to ensure investors have the
information they need to make the best investment decisions for
retirees across America,” said Drew Mahoney, chief executive of the
American Investment Council, a trade group for private-equity firms.
Fee growth has outstripped the overall market’s expansion in part
because fund managers employed financial engineering to boost their
reported returns, the investors in private- equity funds said. An
increasing number of managers borrow cash using so-called subscription
lines and net-asset-value
loans to lift short-term performance and the fees they
charge.
Such stopgaps have grown common because rising interest rates make it
harder for funds to make
payouts the old-fashioned way: selling the companies they
buy and returning cash to their investors. So, it is harder to
distinguish managers who are best at buying and selling companies from
those that employ more financial legerdemain.
Large pensions such as Texas Teachers can get the information to make
apples-to-apples comparisons, but the process is time consuming and
cumbersome, they say. They must negotiate disclosure terms with each
manager, and each one delivers the data differently.
Most small investors in the funds don’t even get that much, said David
Parrish, a lawyer at DLA Piper, which represents about 300
private-equity fund investors. The lack of information makes it harder
to distinguish which managers are the top performers.
Smaller pension funds already are at a disadvantage in that
private-equity firms charge them more than their large counterparts.
The average management fee that private-equity funds charge declined
sharply last year as large customers negotiated discounts, but the
median fee that most small investors pay remained unchanged at 2%,
according to data from Preqin.
ILPA proposed a standardized fee and performance template in 2016;
while some managers have adopted it, about half of the market hasn’t.
The Securities and Exchange Commission attempted to force standardized
reporting through a new rule, but fund managers fought
off the initiative in a court battle last year.
The new proposal is the latest attempt to level the playing field.
“There’s no justification for the [private-equity] community to tell
someone ‘I only give that information to my large investors,’” Parrish
said.
Write to Matt Wirz at matthieu.wirz@wsj.com
Appeared in the January 23, 2025, print edition as 'Private Equity
Pressed to Open Up'.
