Apollo explains CalPERS deal to LPs

In a letter to its LP base, Apollo characterised an agreement to reduce CalPERS’ fees by $125 million over five years as an “enhancement” of its relationship with the pension, and said that it plans to accommodate a trend toward separate accounts.

On Monday, the California Public Employees’ Retirement System announced that it had reached an agreement with Apollo Management to reduce its fees by $125 million over the next five years. In exchange, CalPERS “will also be fully funding all of its existing capital commitments with Apollo”, the pension, the largest in the US, said in a statement. 
On the same day, Apollo sent a letter to its LPs, announcing an “enhancement” of its “strategic relationship” with CalPERS. 
Before stating what that enhancement was, the firm described the positive returns of its recent funds in various asset classes. Apollo also said that it sees a trend toward separate accounts, as limited partners increasingly focus on meeting their institutions’ target rate of return through a “more flexible approach to investment allocations”.
On top of the $5 billion Apollo already manages in separate accounts, the firm will “continue to build a select number of strategic managed accounts”. 
“We strive to deliver attractive risk-adjusted returns in a format that allows for a dynamic allocation to meet the objectives of our investors,” Apollo said.
In the penultimate paragraph, Apollo revealed the terms of its concession to CalPERS. Apollo will reduce CalPERS’ management fee by 0.2 percent in absolute terms, and will reduce its carried interest by 1.3 percent in real terms. The reductions apply to the current balance of CalPERS’ accounts as any new commitments CalPERS makes to Apollo.
Apollo has also agreed to provide enhanced reporting, fee timing, transparency, and elimination of the use of placement agents with respect to CalPERS. 
The “strategic relationship” is the outcome of a months-long review the $212 billion pension was performing on its relationship with the Leon Black-led firm. The review was sparked after CalPERS discovered last year that Apollo had paid a placement agent, Alfred Villalobos, more than $60 million over several years to solicit the pension for more than $3 billion. Villalobos is a former member of the CalPERS board. 
Apollo concluded its letter by inviting any LP that believes a separate account is appropriate for its organisation to contact Apollo, who will be “happy to discuss the opportunity”.