CalPERS shared $3.4 billion in private equity profits over 25 years

By Robin Respaut

SAN FRANCISCO (Reuters) - The nation’s largest public pension, the California Public Employees' Retirement System, said on Tuesday that it had paid $3.4 billion to private equity firms in profit-sharing over the past 25 years - a big step to opening the curtain on an industry known for its lack of transparency and high fees.

As the seventh-largest investor in private equity with roughly one percent of the total market, CalPERS has been under increasing pressure to track and disclose the costs of private equity. Tuesday's announcement comes after the launch of a new proprietary accounting system, called Private Equity Accounting and Reporting Solution (PEARS), that CalPERS has been building since 2011.

CalPERS saw $24.2 billion in net gains since the start of its private equity program in 1990. The pension fund received $4.1 billion in net gains from private equity in the most recent fiscal year, while its external partners earned $700 million in profit-sharing, also known as carried interest.

"Today’s figures are one of the first uses of that system," said CalPERS Chief Investment Officer Ted Eliopoulos, who said PEARS "will increase the transparency of the program going forward."

Few public pension funds across the country report how much of their profits are shared with private equity firms, despite a growing consensus from government officials, regulators, and the public to improve disclosures.

California State Treasurer John Chiang said on Tuesday that CalPERS had taken a "meaningful first step in removing the shroud of secrecy over an investment class which is both controversial and vital to our investment strategy."

But "too much compensation information remains missing," said Chiang, who will sponsor state legislation next year requiring disclosure of all fees from private equity firms wanting to do business with any California public pension fund.

Ninety-eight percent of the funds that work with CalPERS complied with the pension fund's requests for carried interest. Eliopoulous said that going forward, CalPERS would no longer do business with firms that refuse to disclose their share of profits.

Among those who reported, Apollo Global Management LLC collected the largest amount of profit sharing with $742.4 million since 1990, more than one-fifth of CalPERS' total.

Also topping the list were funds managed by many of the biggest names in private equity, including the Carlyle Group, which collected $432.5 million. Blackstone accounted for $159.6 million, Kohlberg Kravis Roberts for $155.8 million, and TPG for $143.5 million.

"What’s most important about this milestone is the public reporting of the carried interest," said Eliopoulos, who said the new disclosure "gives a fuller picture of the cost of private equity."

CalPERS' private equity earnings were based on $29.3 billion in original investments. Total realized proceeds, meaning return of investment plus realized net gain, were $53.5 billion.

Private equity returned 8.9 percent to CalPERS in the last fiscal year, compared to 1 percent from public equities and 2.4 percent overall. The asset class has consistently outperformed the fund’s overall assumed return rate of 7.5 percent, but it also routinely misses CalPERS’ benchmarks.

"We recognize there are still issues the private equity industry needs to address," said Eliopoulous. "But at the end of the day, we believe that we’ve been rewarded for the risk that we took in this program and for the costs that we incurred."

(Reporting by Robin Respaut; Editing by Bernard Orr)

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