CalPERS Pokes Its Board in the Eye by Releasing Private Equity Carry Fee Info After, Rather Than During, Board Meeting

CalPERS is so confident of its control over its board that it has no compunction about broadcasting how little respect it has for them. But as we will show, the board is culpable by being a willing party to this abuse.

The latest example came yesterday, when CalPERS released information about the so-called carry fees it has paid to private equity managers. Remember that this development came about because we publicized the fact that Chief Operating Investment Office Wylie Tollette admitted that the pension fund had no idea what it was paying in carry fees. A media firestorm ensued and CalPERS relented, demanding that all of its general partners provide carry fee data over the history of all of their funds.

Dan Primack of Fortune reported that CalPERS had set a due date of July 13; the Financial Times reported on July 12 that CalPERS had received the information from all but six funds. We submitted a Public Records Act request to find out who the refusniks were. In the end, only three funds had failed to provide the information. Two said CalPERS had the information already; one was a fund in which CalPERS had sold its interest and they basically told CalPERS to bugger off.

As Primack pointed out, the timing of the press release, right before the Thanksgiving holiday, looked to be the classic ploy of breaking bad news during a low viewership period. From his newsletter on Monday:

Head, meet wall: As we discussed last week, the California Public Employees Retirement System (CalPERS) is planning to release its data on carried interest payments at just about the same time that most American attentions will be turned toward turkey and transit. But I’m sure this timing is just a coincidence, as the pension giant required its private equity partners to submit their carry information just a scant 133 days ago.

And even though CalPERS, as Primack pointed out, had said they were releasing the information this week, they were peculiarly secretive about the exact timing. At least one favored reporter was told that the press release would be issued at 8:00 AM Pacific on Tuesday, with a press conference at 10:00 AM. But the ones I contacted were in the dark. For instance, I got this message on Tuesday, a half-hour before the press release went out:

I haven’t heard any details about CalPERS’ big reveal this week. Have you heard anything — is there supposed to be a call today? CalPERS flack is telling me staff is ‘close’ to finalizing the numbers, but not finished yet. (that was yesterday).

Mind you. CalPERS had decided on the Tuesday release schedule last week! Moreover, the fact that there would be a media briefing, which was announced to the media community only via the press release, was not the sort of thing they’d expect to be part of the drill. One reporter e-mailed me when I asked about the timing of a press conference: “From my experience, though, they just send a press release without any notice. Maybe they’ll surprise me.”

Mind you, the two journalists I quoted had not roughed up CalPERS or private equity; there’s no obvious reason for them to have gotten the mushroom treatment. And as we’ll discuss shortly, it is bizarre for CalPERS to be so secretive and defensive when the content of the press release, that CalPERS paid roughly $700 million in “carry” fees in its 2014-2015 fiscal year, and $3.4 billion over the life of its program, was in line with expectations.

But companies generally view media as hostile and therefore not deserving of good treatment, unless they are willing to provide flattering coverage in order to get favored access, so CalPERS may have been using this as yet another opportunity to single out its pets from other journalists.

By contrast, CalPERS’ board, which has a duty to be well informed, was deliberately denied the opportunity to discuss the information in the press release with staff. The media was able to ask questions of CalPERS officers when the board was denied that opportunity.

Bear in mind that just last week, on November 16, CalPERS had its annual private equity program review. This is the one time each year in which CalPERS discusses its private equity program in a holistic manner.

If CalPERS was dealing with the board in an open and honest manner, it would have included the carry fee information in its program review, since CalPERS has always discussed fees and costs as part of these annual health checks. As Dan Primack insinuates, there’s no excuse for CalPERS having taken so long to make this disclosure, save looking for a window when it would get the least possible notice. No doubt CalPERS would make the claim that it needed all this time to put the information together, but that’s bogus. This is a small amount of information and the computations were not complex.

CalPERS might also claim that it needed to run the analysis in its new private equity data system, PEARS, but that is just as ludicrous. Salomon Brothers ran its entire bond trading and analytics platform in Excel through the late 1990s, and I’m told that Deutsche Bank today uses Excel in many of its trading applications. Mind you, I would not recommend Excel in a mission-critical use, but CalPERS could easily have done this analysis in Excel if PEARS was not yet ready for prime time.

You can see the passivity of the board in dealing with the staff’s high-handedness:

Acting Board Member Katie Hagen: Thank you. One last question is do you have an anticipated date on when you’ll have that information available?

Chief Investment Officer Ted Eliopoulos: We’re expecting on the carried interest to be reporting that next week.

Hagen: Great. Thank you.

So Hagen was alert enough to notice the absence of the carry fee information in the annual review. Yet rather than asking “Why was this not included in the annual program review, now that months have elapsed?” Hagen’s question presupposes that it’s perfectly fine for staff to jerk the board around. She meekly acquiesces to what amounts to an admission by Eliopoulos that the data could have been made ready for the board meeting. And the other board members fail to react, presumably because they accept the notion that the board has no right to information but must be content to receive what staff deigns to provide, or they accept the tacit logic, that the need to manipulate the press takes precedence over the board’s duty to supervise.

Yet it’s hard to fathom what CalPERS stood to gain by being so cute. CalPERS reported $3.4 billion in realized carry and on the conference call, an additional $1.7 billion in unrealized carry. That adds up to $5.1 billion. That is almost exactly what Oxford professor Ludovic Phalippou estimated in a short August 2015 paper, that CalPERS’ carried interest was $5.277 billion. Phalippou pointed out that the total paid confirms his assessment that the so-called “hurdle rate” is not at all like a high water mark, which is used to determine carry fee payments for hedge funds:

One key lesson is that hurdle rate does not matter overall.

We see it from CalPERS numbers, they basically paid 20% of any gain overall. If they invested 100, the amount returned before carry was about 170 and the carry taken was 14 (20% of 70). It does not matter what the stock market does etc. It is as if the benchmark was zero.

Usually in financial markets you get a bonus for what you generate above your benchmark. Here we have the confirmation that it is not so. This also means that the usual line “the more carry you pay the happier you should be” is not quite right. You can have a PE programme that is below benchmark and yet have paid a significant amount of carried interest.

Finally, there was less than accurate messaging in the press release. It uses the non-standard nomenclature of “external investment partners” to refer to private equity general partners, which is odd given that this topic is of interest to industry insiders and financial reporters who are used to the established terminology CalPERS also employed the new private equity industry rebranding of “carry fees” as “profit sharing,” in much the same way “leveraged buyouts” was renamed as “private equity” after LBOs crashed and burned in the early 1990s

And this part is particularly disingenuous:

CalPERS has a long history of focusing on transparency in its private equity investing. The Fund provides a list of commitments made in private equity each month, details performance in quarterly and bi-annual reports, provides an annual comprehensive program review to the CalPERS Board of Administration, and lists all management expenses for external partners managing its money in the System’s annual financial report.

First, CalPERS made its carried interest disclosures and its quarterly and bi-annual performance only under duress; the former as a result of the stink we and other reporters made about CalPERS having no idea what it was paying in carry fees; the latter as a result of the settlement of a Public Records lawsuit by the Mercury News in 2002. And as we’ve discussed at some length, CalPERS is still not disclosing the full management fees it incurs; it reports only the amount paid in hard dollars, and omits the portion shifted onto portfolio companies.

CalPERS continues to try to pass off that it is pro-transparency. But as former state official Tony Butka said in a letter to California Treasurer and CalPERS board member John Chiang:

CalPERS CEO Anne Stausboll has made it clear over the years that her Open Letter to Stakeholders of 2011 promising openness, honesty, and transparency was just so much fluff. Her actions demonstrate that she is going to support her staff, right or wrong, assuming that she has the technical expertise to understand the underlying right or wrong of the subject matter.

I find her position unfortunate. In a career working mostly in the public sector, I believe the single issue with makes citizens distrust government employees is the abuse of power as public servants. The recent flurry of news posts about the conduct of staff in the August Investment Committee meeting, as demonstrated by the actual videotapes which are publicly available, make a case that Real [sic] Desrochers and Ted Eliopoulos, as well as Christine Gogan, are very well compensated and high level employees that have breached this trust.

CalPERS staff and its board have utterly lost the plot. They seem determined to fight the public on a battle-by-battle basis. They are winning at best partial victories, and they are losing the bigger war of credibility and trust. The disastrous selection of a scandal-ridden fiduciary counsel, Robert Klausner, who can have been chosen only for his willingness to wrap staff-favorable positions in the fiduciary flag, is sure to do serious harm to CalPERS as the pension fund train wrecks in Detroit and Jacksonville, where Klausner was deeply involved, continue to get unfavorable media coverage. And as we’ll demonstrate in more detail next week, CalPERS effort to burnish its image via its private equity workshop wound up discrediting them as well.

Print Friendly, PDF & Email


  1. Mark from California

    Yves: thanks so much for your continuing pieces on CalPERS. My late father, as a career Calif. civil service employee, drew retirement funds from CalPERS. He would be glad that someone is digging up the dirt (although dismayed by the content). Keep going! – Mark
    P.S. I’ll continue to donate. :)

  2. participant-observer-observed

    Great work on the continued coverage of this pathetic state of affairs.

    Don’t the CalPERS board members have some oath of duty for public service to CA and its tax payers?

    I would love to hear someone ask Gov Brown (supposedly sworn oath to serve CA peopl) what he thinks of this, on the record. Ditto for Kamila Harris and HRC, for that matter. Doesn’t HRC have some grand buy-in on this recklessness method of “entitlement reform.” (The reform seems to be: you are entitled to your retirement savings, but only until Wall Street pays off enough state cronies to steal it away from you!)

  3. flora

    Your last paragraph sums it up. I have given CalPERS CEO and staff benefit of the doubt. Until now.
    Thanks for your reporting.

  4. Kokuanani

    Apparently the LA Times is at last picking up the story. This from a news summary that I get, Essential California:

    CalPERS’ big news: The California Public Employees’ Retirement System made an important disclosure Tuesday: It paid $3.4 billion in performance fees to its private equity managers since 1990, while the controversial sector generated $24.2 billion in net profit for retirees. The numbers are expected to generate more scrutiny about how the public pension system, the nation’s largest, is run. Los Angeles Times

  5. none

    Is 3.4B out of 27.6B (=3.4 + 24.2) a bad amount? It looks lower than the 2%+20% convention that’s been mentioned here a few times.

    1. Trustee

      It should look better than a typical 2+20. I ignores 17 years of the 2%. It also ignores the 2% on partnerships that lost money or failed to meet the hurdle (if any).

  6. Andrew M Silton

    Rather than incorporating the carried interest data into CalPERS’s performance disclosure table for PE (, they released the numbers in a separate Pdf document (

    Anyone seriously interested in evaluating the performance of CalPERS’s managers would be hard pressed to draw meaningful conclusions. CalPERS has made a disclosure, but they haven’t been transparent.

  7. Assolonius

    “Is 3.4B out of 27.6B (=3.4 + 24.2) a bad amount? It looks lower than the 2%+20% convention that’s been mentioned here a few times.”

    The carried interest amount conveniently omits “inactive” funds, however inactive funds performance was included in PE’s overall performance. Thus, fees and performance arent apples to apples, fees were understated.

    Also perfomance was overstated by the inclusion of co-investments, which are “0 fee” according to calpers, and if you believe that then i have a bridge…..

    So, no way did calpers negotiate down from 2/20 to 1/12 or whatever, Real Desrochers just recently stated at a board mtg that they have to pay full freight to get access to “top managers”, so the question then is why do they need a team of 60 people when theyre: not negotiating, allocating based off past performance……

Comments are closed.