State Treasurers Call for Better Disclosure of Private Equity Fees

By ASPPA Net Staff • August 17, 2015 • 0 Comments
Require general partners to do a better job of disclosing private equity fees. That’s the message that treasurers from states in every region of the United States, as well as two of its largest cities, sent to Securities and Exchange Commission Chair Mary Jo White in a recent letter.

The treasurers of California, Missouri, New York, Nebraska, North Carolina, Oregon, Rhode Island, South Carolina, Vermont, Virginia, Wyoming, Washington, D.C. and New York City sent the letter. Collectively they oversee $1 trillion in public pension fund assets, Pensions & Investments online reports.

They note that pension fund investments in private equity have outperformed other asset classes and that they are an attractive option for those systems. But one of their downsides is that their cost structures are complicated, which, in turn, creates further problems. Says the letter, “This complexity, combined with a lack of industry disclosure best practices, has led to an uneven playing field for state fiduciaries seeking to report private equity fees fully.”

They observe that of the four types of private equity firm expenses — management fees, fund expenses, allocated incentive fees and portfolio-company charges, a portion of which serve as offsets or contra-expenses to limited partners — only directly billed management fees can easily be segregated and therefore regularly disclosed. Not only that, they argue, information can be inaccessible. “Though private equity firms generally disclose information on all types of fees, it is often reported deep in annual financial statements and is not reported directly to limited partners on a quarterly basis. This lack of clear and frequent reporting has resulted in an uneven approach to fee disclosure from private equity general partners to limited partners,” the letter states.

The overall result, they say, is a culture in which management fees reported by state pension funds often do not reflect total management fees accrued by private equity firms. And they further argue that since there is no clearly defined standard, states that voluntarily disclose more comprehensive accounts of total fees and expenses are at a disadvantage compared to those that do not.

Increased disclosure transparency, they contend, will provide limited partners with a stronger negotiating position and ultimately result in more efficient investment options. And they posit that their stance is premised on more than their own administrative concerns. “We have a fiduciary obligation to achieve these goals, and therefore assert that greater private equity fee disclosure standards are in the public interest,” they assert.