By JENNY ANDERSON, no The New York Times
Published: April 2, 2010
Private equity deal-makers, those kings of corporate buyouts, made billions for themselves when times were good. But some of their biggest investors, public pension funds, are still waiting for the hefty rewards they were promised.
The nation’s 10 largest public pension funds have paid private equity firms more than $17 billion in fees since 2000, according to a new analysis conducted for The New York Times, as the funds flocked to these so-called alternative investments in hopes of reaping market-beating returns.
But few big public funds ended up collecting the 20 to 30 percent returns that private equity managers often held out to attract pension money, a review of the funds’ performance shows.
Many public pension funds are struggling to recover from a collapse in the value of their portfolios, despite large private equity investments that were supposed to help cushion their losses.
Fees are at the center of the debate over the divergent fortunes of private equity managers and their investors, because fees often make a big dent in any investment gains.
That “raises the question as to why they accept to pay this level of fees,” said Oliver Gottschalg, a professor at the HEC School of Management in Paris who conducted the study on private equity fees.
State and local pension assets declined by 27.6 percent from the end of 2007 to the end of 2008, wiping out $900 billion, according to the Government Accountability Office.
Those poor returns have rankled some longtime private equity investors like the California Public Employees’ Retirement System, or Calpers. In September 2009, it “strongly endorsed” principles proposed by the Institutional Limited Partners Association, which represents private equity investors, to keep management fees in check and improve disclosure about fund performance.
The funds vary in how they report their performance and calculate their returns, allowing a significant number to classify themselves as “top quartile,” or the best performers.
“The fees paid to private equity managers has been a source of great frustration,” Joseph A. Dear, the chief investment officer for Calpers, said in an interview, adding that the managers “shouldn’t be making a profit on the management fee. They should make money when their investors make money.”
Still, despite the high fees, he said the funds’ performance had been good. “We don’t expect 20 percent,” he said. “We expect 3 percent more than public markets, net of fees.”
Private equity executives generally say their fees are justified by their market-beating returns. Reached by e-mail on Friday, Robert W. Stewart, a spokesman for the Private Equity Council, the industry’s trade association, declined to comment.
Public funds pay a lot of money to managers of so-called alternative investments like private equity, venture capital, real estate and hedge funds. In 2009, the Pennsylvania Public School Employees’ Retirement System paid $477.5 million in fees — 20 percent more than it did in 2008 and 283 percent more than in 2000, the earliest year for which data was available.
These funds generally charge fees totaling 2 percent of the money they manage and then take 20 percent of the profits they generate.
And yet, even after paying hundreds of millions of dollars in fees, the Pennsylvania fund is ailing. It lost more than a quarter of its value during its latest fiscal year and is now worth less than it was a decade ago, although its performance has improved recently.