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Why LPs are upping the ante on fee verification

A number of factors are pushing investors to seek outside help in sifting through their fees, expenses and carried interest payments.

At its March board meeting, Teachers Retirement System of Oklahoma mulled hiring external help to understand if it was paying managers the correct fees according to terms laid out in its limited partnership agreements. The reason: it had found at least four errors in its recent history of GP transactions. Last week the pension picked Meketa Investment Group to do the job.

The number of public pension systems thinking about seeking external help for fee validation is on the rise, sources tell us. New Mexico State Investment Council and California State Teachers’ Retirement System are among the LPs who have already done so. The Institutional Limited Partners Association recently teamed up with fund services business Colmore to offer institutional investors a new membership service for fee validation. Service providers are ramping up their teams and processes and fielding more presentation requests from LPs, we are told.

The requirement for fee validation is being driven by the growing complexity of LPAs – no two are alike, says Meketa’s private markets director John Haggerty – and the growth in size of private equity portfolios. In the case of the California pension systems, it was legislation requiring them to report GP fees that spurred them to seek help. Public consternation about the fees paid to GPs – such as that evident in Pennsylvania – could well push more public pensions to dig into the numbers.

Two kinds of fee validation providers have emerged: investment advisors like Meketa, Hamilton Lane and Pavilion Advisory Group – who can bundle the service with their traditional portfolio monitoring work – and fund services businesses like Colmore and SS&C Technologies.

Oklahoma selected Meketa because such groups have “experience-based judgement” when interpreting legal documentation and can use their relationships to resolve fee discrepancies, according to pension documents. New Mexico SIC cited the “arm’s length separation between assessment of fees and practices and how those factors might impact our future/ongoing engagement with managers” when it selected Colmore for fee validation services last year, according to spokesman Charles Wollmann.

Oklahoma will be paying Meketa about $330,000 a year – plus $4,000 for each additional fund onboarded – for a suite of services that includes fee, expense and carried interest calculations onboarded over the contract period. Uncovering an expensive error in favor of the GP could potentially cover the whole cost of the contract. But let’s not forget that errors can work in both directions.

This article was first published by sister publication Private Equity International.