UPDATE: Includes comments from CalPERS and Yucaipa’s Burkle
As reported earlier here, California’s giant pension fund has settled its case with the California First Amendment Coalition, agreeing to disclose information about the money it pays to managers of it private investments.
The settlement is significant because CalPERS is considered a bellwether of investment trends in the venture world.
The best starting point for information on the settlement is this link. It has pretty much everything.
Below is a summary of some findings coming from the disclosure settlement so far (see the actual legal wording here).
According to the settlement, CalPERS has disclosed (as of yesterday) the management fees it pays to individual venture capital, hedge, and other private equity funds in which CalPERS invests.
The information disclosed by CalPERS covers the period 2001 through 2003. CalPERS also agreed to disclose management fee information for 2004 and 2005 as it becomes available. (CalPERS negotiated the right to a years’s lag in reporting the fee info). However, CalPERS did not release the precise fee contract terms of its partnerships, for example the fees as a percentage over the funds managers invested.
In its analysis of the fee disclosures, the CFAC concludes CalPERS is paying some pretty ï¿½heftyï¿½ management fees. In general, CalPERS is giving away 25 percent of its share of profits in the form of ï¿½carried interest,ï¿½ compared to an average industry average of around 20 percent, the CFAC found. The CFAC based its estimates on newly disclosed documents showing CalPERSï¿½ profits, on a fund-by-fund, year-by-year basis, dating back to 1999, from its venture capital investments. CalPERS previously had disclosed only cumulative profits in private equity funds. On this basis, the share of CalPERS’ realized profits that went to managers totaled approximately $770 million from 1999 through 2003, according to a statement released today by the CFAC.
CalPERS spokeswoman Patricia Macht said the CFAC calculations are made on insufficient data, and made “zero sense.” However, she did not say exactly how much of its profits CalPERS gives away. She said CalPERS did not believe the fees are “hefty.”
With few exceptions, CalPERS does not have records showing the actual profits that individual venture capital firms paid themselves from profits attributable to CalPERS’ profits, CFAC noted. However, CalPERS’ Macht said the pension fund knows the percentage of profits it is due, according to the terms it negotiates with managers, and that the fund’s accountants makes sure that that CalPERS gets that money. CalPERS also relies on the independent auditors of the investment funds themselves to make sure that CalPERs gets it’s fair share, she said.
Over the past couple of years, weï¿½ve already reported on some of the political donations to CalPERs from the funds it invests in. CFAC points to a couple cases.
1) Fees paid to three funds of Yucaipa Companies. The CFAC states:
ï¿½According to several press reports, the funds’ head, Ron Burkle, has made political campaign contributions to State Treasurer Phil Angelides, who sits on CalPERS’ board. Another board member, former San Francisco mayor Willie Brown, has done work for Burkle, according to press reports. The CalPERS documents show the Yucaipa funds were paid $8.7 million in management fees in 2003, or 17.3% of capital invested. Two of the three Yucaipa funds have negative rates of return.ï¿½
But we should put that in perspective: CalPERS’ Macht said the 17.3 percent may look high, but stems from the fact that Yucaipa Companies is a “young firm,” and so hasn’t made a lot of investments to date. The fees it draws for its operating budget look high — as a percentage — in relation to others. In fact, we called up Burkle, and he had good little statistic for us to chew on: He’s been investing since 1986 with his own money, and said he’d returned, on average, about a 42 percent a year (42 percent gross IRR) since 1986. So the focus on the young Yucaipa’s fees is a bit misplaced, he said. And he’s tired of the Willie Brown reference, he said. He said that connection was over a decade ago — and so played no role in Yucaipa. He’s a regular contributor to many campaigns, he said.
2) ï¿½Other CalPERS funds with political connections to members of the CalPERS board are New Mountain Partners, which was paid a management fee of $1.4 million in 2003, and Reliant Equity Partners, which was paid a management fee of $1.1 million. According to press reports, New Mountain’s founder, Steve Klinsky, has contributed to Angelides’ campaign. An adviser to one of New Mountain’s managing partners helped raise money for Angelides and also contributed to the campaign of state Controller Steve Westly, another member of CalPERS’ board, according to press reports.”
We talked to New Mountain about this two years ago, and they too said the donations had nothing to do with the raising of their fund.
The documents show that CalPERS pays just over $200 million per year in management fees to 416 private equity funds in which CalPERS has already invested $13.5 billion, and to which it has committed to invest $21.1 billion. In 2003, the last year for which information is available, the biggest fee, $8.1 million, was paid to Lombard/Pacific Partners, in which CalPERS has invested $347 million since 1995. Twelve private equity funds were paid management fees of over $3 million a piece in 2003.
Here’s CalPERS’ press release.