CalPERS’ carry disclosure a ‘PE PR coup’

The US public pension system’s milestone decision to reveal its profit sharing numbers was broadly welcomed by the industry.

This week the California Public Employees’ Retirement System (CalPERS) became the first heavyweight US pension to disclose carried interest paid to its private equity managers, following prior criticism of its fee-tracking practices.

The US’ largest public pension plan said that since it began its private equity programme 25 years ago, it has shared $3.4 billion of profits with its GPs, while realising net gains of $24.2 billion for itself. Private equity, it stressed, was CalPERS’ best performing asset class.

We spoke to a cross section of senior PE participants to gauge the significance of CalPERS’ disclosures for the sector.

Canadian institutional investor:

“Disclosure may or may not be helpful to certain LPs and GPs, but I believe it is inevitable, and frankly long overdue.

At the same time, the amount of total fees-plus-carry paid by LPs off gross IRR is not very relevant; what is relevant is net IRR, and how that net IRR compares with what the LP would be able to achieve if they invested the equivalent amount on their own, in the form of direct investments. For many LPs, that alternative is simply not feasible, even in the medium term.”

Fund manager:

“CalPERS had some issues on how [carry] was calculated. This is a good development. But there is a big misunderstanding in general that if you paid billions in carry that is a lot of money – it is only because the performance has been so stellar you had to pay carry.

The reason why CalPERS and sophisticated LPs go into PE is because PE is the best performing asset class. On that level the outcry on fees is not justified. There is an alignment of interest. It’s different for management fees or fees on portfolio companies.”

Placement agent:

“The carried interest payments are known [by the LP and GP]. The controversy is around fees that are hidden. Carry comes from good performance, but maybe some people forget that part of it and that could lead to more political scrutiny.

GPs that need money will always continue to solicit funds like CalPERS, but there will be managers that say if we don’t need that investor [that publishes fund information] we won’t take their money. It is not information we want to share in the public domain. The question is, do others [LPs] do the same?”

UK fund manager:

“There is a massive amount of noise about private equity and the implication is that the industry is wilfully opaque, but overall there is a very immediate relationship between most GPs and investors. This is just an episode in a broader [transparency] evolution. It is right that CalPERS put [how much it’s paid in carry] in the context of performance; big numbers always look a bit strange when taken out of context and it is easy to be steered toward the wrong conclusion.

How helpful that it is happening now – in the middle of a political cycle – is another matter, but there have always been big investors who are quite political and we have to accept that.”


“People say carry is under threat but I don’t think so. CalPERS doesn’t say carry is wrong. This isn’t about compensation, it is about investor return. On that list there are a lot of dashes, meaning no carry. The downside risk is there. [The carry paid to] Apollo was enormous but that implies the return was enormous.

When you read the CalPERS release, the key take-away is that it was a tremendous chapter of investment for them. They have made a ton of money [and] said it was their best performing asset class. Some of their returns have been double their base case. That has been a PE PR coup.”