I wanted to chime in on the news that Calstrs and Calpers, the two giant US pension funds have no idea of the total amount of fees that they pay their private equity and venture capital managers. For those of you who are unaware, Calstrs stands for California State Teachers Retirement System and Calpers is California Public Employees' Retirement System which is part of a US government agency. Calpers Board of Directors include 3 members who are appointed by the California Governor, and one by specified leaders of Legislature, and 4 members who are ex officio (California State Treasurer, California State Controller, Director of the California Department of Human Resources and designee of the California State Personnel Board)
Why does this matter? Because much of the money that is given to venture capital firms who in turn, invest it in technology start-ups is provided by foundations, endowments, pension funds and other institutional investors. These so called “sophisticated” investors have a duty to invest wisely on behalf of their beneficiaries whether that is to provide for pensions or achieve some charitable goal. When these two investors, who collectively have over $50 billion currently invested in private equity across hundreds of managers, don’t know how much they have been paying in carried interest and other fees over a period of some 25 years is both shocking and I would argue almost a dereliction of duty.
How can you have an objective evaluation of investment performance without this information? Having worked in this industry for the past 10 years and having being an LP, and having seen the audited financial statements that all GPs are required to provide to their investors, I can assure you that one certainly can calculate the amount of carried interest and fees being charged –nothing more sophisticated than a calculator is required. However, more importantly, this lack of disclosure also creates the perception that alternative investments are too complicated, too risky, too opaque and should be avoided, and in the long run that does not do our industry any good.
By Ashok Parekh, Director of Investment Services