The California Public Employees’ Retirement System (CalPERS) used to be the 800 lb. Gorilla of private equity, with hundreds of fund relationships and seemingly-unlimited resources.
Between 2006 and 2008, for example, the pension giant committed $36.7 billion to 130 funds. Then came a massive placement agent scandal, a change in management and big pullback. Between 2009 and 2013, CalPERS deployed just $5.2 billion to 23 funds (despite producing 3, 5, 10 and 20-year returns — through fiscal 2014 — that beat their public equity portfolios).
The marketing message, of course, is that CalPERS has become smarter and more selective — sloughing off under-performing managers and doubling down on a smaller group of firms in order to gain better leverage when negotiating terms.
But the reality is that CalPERS is once again showing signs of dysfunction.
During an investment committee meeting in April, the system’s chief operating investment officer, Wylie Tollette, was asked about how much the system had been paying out in carried interest to its private equity managers. His reply:
“Profit-sharing in private equity is embedded in the return. It’s not explicitly disclosed or accounted for. We can’t track it today.”
Before continuing, let me stipulate that the amount of carried interest paid by a pension fund is tied directly to investment performance. The better the fund’s returns, the more that will be paid in carry. If an LP brags about paying a small amount of carry, that likely means it has lousy returns.
But, that said, Tollette’s claim is absurd. Either he’s not telling the truth, or he’s overseeing a massive breakdown in financial controls. Whichever way you slice it, the result should be pissed off pensioners.
CalPERS receives annual audited financial statements from all of its private equity fund managers. These documents do indeed include information on carried interest.
Yes, you may need a calculator and a bunch of time to break out your pro rata pieces of the funds, or to work out the amount of carry paid since their inception, but it most certainly can be done. I’ve spoken to a variety of senior LPs at other institutions (including public pensions) over the past day, and each of them is dumbfounded by the CalPERS claim.
Another CalPERS excuse for being unable to calculate its carry is that there is no standardized reporting of private equity returns. This is true. But it doesn’t prevent CalPERS from regularly publishing data such as internal rates or return (IRRs) and total fees paid. How come lack of standardization prevents CalPERS from calculating carried interest, but not numbers that come from the same primary sources?
Finally, let’s go back to that part about CalPERS consolidating its manager roster. LPs tell me that if CalPERS feels it is not receiving adequate information on carried interest, there is a simple solution: Call the PE firm and ask for it. “There is no way a general partner would refuse to send such basic information to one of its largest LPs,” says a longtime private equity portfolio manager.
A CalPERS spokesman says that, in the system’s opinion, this is a “private equity industry issue.” No. This is a CalPERS issue. Once again, America’s largest public pension has its house out of order.
Get Term Sheet, our daily newsletter on deals and deal-makers.