CalPERS to seek fee reductions on new commitments

The $182bn pension, the largest in the US, will negotiate with private equity firms for fee reductions on all new commitments. The practice follows a policy the pension implemented in March to negotiate fee reductions with hedge funds.

The California Public Employees' Retirement System will begin negotiating with private equity managers with whom it wants to form relationships to reduce fees, a spokesman for the pension said.

The fee reduction will govern new commitments and new relationships, but the $182 billion pension also will ask its existing managers to cut fees when they seek more money from CalPERS, the spokesman said.

“In this market, the primary source of wealth creation is capital gains and should be that, not fees,” the CalPERS spokesman said. “There needs to be a greater focus on justifications of management fee levels.”

CalPERS’ practice of negotiating fee reductions with private equity firms will be similar to a policy the pension set in March for hedge funds, the spokesman said. Hedge fund fees should be based on long-term rather than short-term performance, the pension said at the time.

Performance fees should be based on long-term performance, and mechanisms such as delayed realisations and clawbacks can better align long-term interests of managers and investors, CalPERS said in the policy. Management fees should better reflect the cost associated with generating performance and not be an invitation for asset gathering, CalPERS said.

“The present model provides the possibility of a hedge fund manager realising a 20 percent performance fee at the end of a bonanza year. If the fund suffers a significant decline the next year, the manager could still have a large net gain at the end of the two years, but the investor may break even or even lose money,” CalPERS said in a statement in March when the policy was set.

CalPERS has negotiated with private equity managers in the past for fee reductions, the spokesman said. The new policy is from the CalPERS staff and will not be voted on by the board, though the pension's board is aware of it, the spokesman said.

CalPERS recently boosted its allocation to private equity from 10 percent to 14 percent as a way to address the “misalignment of the portfolio in the wake of the financial market crisis of 2008”, the pension said.

Other LPs have set rules by which they are trying to negotiate better terms with private equity firms. The Oregon Investment Council drafted a set of principles it uses when considering making commitments to private equity firms.

The $56 billion pension has been negotiating with Fisher Lynch Capital for a reduction of fees. Fisher Lynch is looking for a $500 million commitment from the pension.