Hot private equity marketplace reduces Calpers' bargaining power

By Robin Respaut

SAN FRANCISCO (Reuters) - The California Public Employees' Retirement System described on Monday an increasingly competitive investment marketplace in private equity that has in recent years reduced the negotiating power of large, long-time investors like public pension funds.

Calpers staff, during an educational workshop, said the tremendous demand to invest in private equity funds outweighs the supply. Such disparity has enabled private equity firms' general partners to set favorable terms, even amid political and regulatory scrutiny of the industry’s high fees and lack of transparency.

“The industry is growing very fast in terms of demand of investors,” said Réal Desrochers, Calpers' managing investment director of private equity. “Calpers is an important investor, but a smaller part of the industry.”

Indeed, Calpers, with $300 billion in total assets and the seventh largest investor of private equity overall, now makes up 1 percent of the total marketplace with approximately $30 billion in assets, down from over 2 percent in 2007.

Calpers has felt increasing scrutiny in recent months to examine the costs of its private equity holdings. This month, Calpers expects to publish the amount it pays in carried interest. It also plans to examine other private equity fees and expenses, after California State Treasurer John Chiang sent a letter to the board urging it to do so.

Calpers Chief Investment Officer Ted Eliopoulos described the industry as “on the brink of some dramatic improvements for transparency and reporting.”

“There has certainly been discussion about the need for change of the fundamental terms and conditions of private equity investment agreements, and rightly so,” said Eliopoulos. “The fees are too high. The fee structures are too complex and not transparent enough.”

Negotiating better terms has not been easy. Calpers senior counsel Marte Castanos said that general partners sometimes play limited partners, such as pension funds like Calpers, against one another.

“We are on an island. There are dozens of others negotiating, and they like to keep it that way,” Castanos said. “It’s an uphill battle.”

Private equity is Calpers’ most expensive asset class, but it yields the highest net returns. The asset returned 8.9 percent in fiscal year 2015 and has consistently outperformed the fund’s overall expected return rate of 7.5 percent. But private equity investments have also routinely missed Calpers’ class benchmarks over the past decade.

(Reporting by Robin Respaut; Editing by Leslie Adler)

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