CalPERS Looking to Change Relationship with Fund Managers

By Marc Raybin
September 15, 2009

With more than $20 billion invested in private equity, the California Public Employees' Retirement System (CalPERS) holds quite a bit of clout in the asset class. When the fund speaks, investors should listen. The nation's largest public pension fund said on Tuesday it supports the proposals put forth last week by the Institutional Limited Partners Association (ILPA) in an effort to improve the relationship between limited partners and general partners in private equity investing.

The ILPA published their ideas about how to alter the alignment, governance, and transparency of the relationship between institutional investors, such as CalPERS, and general partners managing the private equity funds. Specifically, the principles are as follows, according to CalPERS:

Alignment of interests: Management fees should cover reasonable operating expenses of the firm and not be excessive; the general partners' capital commitment to the fund should be substantial, with a higher percentage in cash; and there should be stronger provisions to help avoid profit distribution imbalances between the GPs and LPs.

Governance: Limited partners, collectively, should have stronger rights to suspend, terminate or dissolve a fund; the fund auditor should be independent; and meetings of limited partner advisory committees should be standardized and adhere to best practices.

Transparency: General partners should provide greater detail to investors about fees generated, carried interest profits received and underlying portfolio company performance.

"We feel the time is right for some changes to the institutional foundation for best practices," said Clark McKinley, a spokesman for CalPERS, which has been investing in private equity for nearly 20 years. "There have been some changes, [but] we feel it is time to do a recalibration."

McKinley pointed out these proposals are still in the formative stages and once they are adopted by ILPA, will be used on a voluntary basis by CalPERS. "We are not going to use them as a hammer," McKinley said.

ILPA published its proposed changes for the private equity space on Sept. 8, and according to McKinley, is still taking comments on their ideas from investors.

CalPERS has $20.6 billion in capital invested in private equity, with nearly $22 billion waiting to be deployed. As of Sept. 10, CalPERS said the value of its fund was at $198.5 billion. The fund provides retirement benefits to more than 1.6 million state, school and local public employees, retirees and their families in California.