The Oregon Investment Council – which has not been making private equity commitments recently – has drafted a set of principles it will use when considering future investments, including asking GPs to reduce management fees and take carry only after all capital is returned to limited partners.
The council, which manages an investment portfolio of more than $56 billion, approved the principles at its meeting Wednesday. A spokesperson stressed the guidelines are not meant to be policy the council would be forced to abide by for each investment.
“The principles should be considered as a guide,” the spokesperson said.
OIC also is not planning to go back to existing managers and ask that fees be reduced, the spokesperson said.
“The idea was to lay this out there for partnerships going forward,” the spokesperson said.
The principles are meant to “better align interests between general partners and limited partners, enhance fund governance, and provide greater transparency to investors”, according to a draft approved at the meeting.
Carry should only be taken after 100 percent of capital, net of all fees and expenses, has been returned to the investor who has provided the vast majority of the risk capital, the draft states.
Management fees “should not be a major profit center for the firm”, according to the draft. “Fees should be reduced for all but the most modest funds with larger funds taking larger reductions in ‘standard’ fees, acknowledging economies of scale.”
GPs should avoid charging transaction, monitoring fees and other fees to a deal or a portfolio company, the draft states. Also, all fees earned by the GP should offset management fees and partnership expenses during the life of the fund and at the end of the life of the fund, the draft states.
Also, the GP’s capital commitment to the fund should reflect a substantial amount of the net worth of the principals making up the general partner, and a high percentage of the amount should be contributed with cash, the draft said.
OIC is asking that the partnership not be required to bear expenses of the GP related to entertainment, publicity, fundraising, office space, information technology, employment, personnel or other matters that are generally considered corporate overhead, the draft states.
Limited partners should have more say over a fund, including allowing a majority of LPs to suspend or terminate the commitment period, remove the general partner or dissolve the fund, the draft states.
Some of the guidelines relate to a kick-back scandal involving the $122 billion New York State Common Retirement Fund. Four people have been indicted in that scheme, in which the Securities and Exchange Commission and New York’s Attorney General Andrew Cuomo alleges former political operative Henry Morris and former pension chief investment officer David Loglisci collected sham finder’s fees from investment firms for commitments from the pension.
To avoid potential fraud, placement agent and fundraising fees should be fully disclosed, according to the draft. GPs should alert LPs if the firm receives any SEC inquiries or “meaningful” legal actions and GPs should make fee, carry and “all other ancillary fee calculations” more transparent and subject to LP and independent auditor review, it said.
Other public pensions have expressed interest in reviewing OIC’s draft and potentially using the draft as a template, the spokesperson said.
Meanwhile, Oregon has not made any commitments to private equity this year, and there are no plans in the near future for new investments, the spokesperson said. He said OIC may look into new private equity investments later this year.
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