On Monday, the Sacramento Bee published an editorial that took up many of the issues that we’ve raised in recent months about private equity firms’ fee abuses and the extraordinary shroud of secrecy that the industry has thrown over most of its activities. This article is a confirmation of the importance of our ongoing Public Records Act efforts with CalPERS to obtain more information about its private equity investments (while we lost a case on one request, CalPERS still maintains it will fulfill that request, and we have others where CalPERS’ response is very problematic that we will discuss in upcoming posts).
Here is the critical part of the SacBee editorial titled Secrecy helps private equity line pockets at expense of public:
In a speech to private equity industry members in May, Andrew J. Bowden, director of the SEC’s Office of Compliance Inspections and Examinations, said that he’s been seeing troubling trends in the public equity industry. One is vague language in contracts. “This has created an enormous gray area, allowing advisers to charge fees and pass along expenses that are not reasonably contemplated by investors.” Furthermore, he said agreements don’t give investors “sufficient information rights to adequately monitor their investments.”
We wouldn’t necessarily care about private well-heeled investors getting fleeced by financial firms. It’s their money to lose. But investors include public endowments and pension funds such as CalPERS. And if CalPERS is getting soaked, so is the public.
It’s virtually impossible to tell if that’s the case, however, since the agreements that public pension funds have with private equity firms are exempt from California’s Public Records Act. CalPERS does disclose the assets it has in private equity, their value and the rate of return, but not the fees paid, which could be in the millions. If these documents were public, then analysts and financial watchdogs would be able to keep track of schemes that cost the funds and their beneficiaries.
The reasoning behind the disclosure waiver was to protect investment strategies. But they seem to have done a better job of protecting the ability of public equity firms to line their pockets with the public’s money. This is an issue ripe for legislation.
This editorial is significant, particularly for citing CalPERS, which does provide more investment information than most other public pension funds, as an example of inadequate disclosure. The editorial board has thrown down the gauntlet that the private equity firm secrecy regime is damaging to the public and needs to be cut back in a major way.
The Sacramento Bee has great clout with the California legislature, and the one thing CalPERS and other public pension funds are afraid of is the legislature. While this editorial isn’t quite like the cavalry riding over the hill, it’s tantamount to hearing its horns coming straight in our direction.