Private equity fees to be disclosed under California pension law

(c) 2016, Bloomberg.

California Gov. Jerry Brown signed legislation requiring public pension funds to disclose more about how much they pay managers for private equity investments.

State Treasurer John Chiang, who sits on boards of the California State Teachers’ Retirement System and California Public Employees’ Retirement System, the nation’s two biggest public pensions, said in a statement that it will create “nation’s most robust transparency requirements” concerning investments in the buyout funds.

State and local pension officials across the country have invested $420 billion in private equity, but in many cases are required by industry contracts to keep details of fees secret from the public and sometimes even their own boards. The Securities and Exchange Commission reported in 2014 that such firms frequently charged excessive and undisclosed fees.

“California taxpayers and pension beneficiaries will now get to go behind the curtain to view the previously hidden fees and charges paid to Wall Street firms,” said Chiang. “Every dollar paid in fees is one less dollar available for promised pension benefits.”

Legislation requiring more disclosure was introduced in at least seven states this year, but with Brown’s signature Wednesday, California is the only one to enact it into law. In many cases public pensions have lobbied against the legislation because of concerns that disclosure might lock them out of potentially lucrative investments they say they need to fill a $1.8 trillion gap in needed funding for benefits.

Firms often charge fees of 1 percent to 2 percent, plus 20 percent of profits, though they sometimes add other charges, as well. The all-in cost can run upwards of 3 percent, 100 times what an institution might pay for an index fund. The pensions sign contracts that keep most of the numbers hidden from outsiders.

James Maloney, vice president for public affairs at the American Investment Council in Washington didn’t immediately respond to a phone message. The council represents private equity firms.



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