Private Equity Expert/Reformer Opposes California Treasurer Chiang’s Now-Phony “Fee Transparency” Bill

As we wrote last week, it’s become apparent that the private equity fee transparency bill that California Treasurer announced last year and launched this year was never intended to live up to its billing. From our post:

AB 2833 was amended on Wednesday so as to be so pointless that we oppose the bill and urge California readers to call and write their representatives to urge them to vote against it in its current form.

Worse, it’s obvious that Chiang and his staff merely used this bill as an opportunity for the Treasurer to pretend to be on the right side of the growing consternation over the ignorance of limited partners like CaLPERS of the full fees and costs of investing in private equity, which come at the expense of their beneficiaries.

This bill has the hallmarks of cynical ploy. Chiang was not only unwilling to challenge the private equity industry. He failed even to make a pretense of standing up to their stooges, the captured California public pension funds. Not only did he fail to put up a fight for having the bill deliver on its promise, he never took basic, pro-forma steps to advocate for it.

We explained how one of the big reasons to require comprehensive reporting of private equity fees is that the fund managers, aka “general partners,” forced the companies that they buy with investors’ money to enter into agreements with their firm or affiliates that allows them to syphon money out of these companies. If you think that’s an exaggeration, consider this section of a post Secret Fees, Private Jets, and the Pension Crisis by Illinois state senator Daniel Biss, who is sponsoring a much tougher private equity disclosure bill in that state:

When the fund manager controls a company, they can do what they want with it — including charging it for all sorts of “services” such as flying around in a private jet.

I’ll say that again: Leonard Green & Partners takes TRS’s money, buys a company with it with the purpose of increasing the company’s value to benefit TRS [Illinois’ Teachers Retirement System], and then instead tells the company “I happen to own a private jet and I’m going to make you reimburse me for the cost of flying my own employees around in it”.

Just to be clear, this isn’t my conspiracy theory. This is what Leonard Green & Partners told the SEC in the ADV form they filed in 2015!…

Wouldn’t you like to know how much that payment is?

Too bad. You don’t get to…

…there are a variety of other types of fees, such as “portfolio company fees” (situations like the Leonard Green private jet payments I described), “monitoring fees” and others, that are usually completely undisclosed to the public, and often only partially disclosed (at best!) to the pension fund itself.

This stuff really matters. Pension funds pay hundreds of millions of dollars to alternative investment managers, and fees are almost completely secret from the public, and only partially understood by the funds themselves. At the same time, as will surprise exactly nobody besides the self-interested defenders of the status quo, fees and investment structure are very important in predicting net returns.

We’ve embedded a letter from Michael Flaherman, the former head of CalPERS’ Investment Committee, who later worked for nine years in a senior role in a private equity firm, in opposition to Chiang’s bill, AB 2833.

Flaherman’s opposition is significant not merely because he has been working as a private equity reformer. He’s now a visiting scholar at UC Berkeley and focuses on private equity. We’ve posted on some of his investigations into private equity abuses (see here, here, and here).

Flaherman was initially asked by Chiang’s office to help draft AB 2833 and some of his language was in the initial version of the bill, which we deemed to be effective in forcing disclosure of now-hidden and often abusive charges. However, he was excluded from the process as the opposition weighed in.

As you can see below, he gives a detailed explanation of why various changes to the bill that its backers will not doubt claim are inconsequential in fact gut it.

The bill comes before the Senate Committee on Public Employment and Retirement this afternoon, which is its first stop in the Senate. Note that a different version of the bill made it through the Assembly; the Public Employment and Retirement is its first stop in the Senate.

If you are in California, please call or write your state Assemblyman and Senator to let them know you oppose the bill in its current form because it offers the only the pretense of transparency. Tell them it is worthy of support only if it is restored to the original strong form of the bill or something very close to it. Please put “Oppose AB 2833” in the headline, since that will be help get their attention.

If you have time, please e-mail your Assemblyman and Senator (contact information here) and cc the members of the committee:

The members of that committee are:

Richard Pan (D)

Mike Morrell (R)

Jim Beall (D)

Isadore Hall, III (D)

John M. W. Moorlach (R)

We also encourage you to cc Chiang and his deputy Grant Boyken:

As always, thanks for your interest and support!

Michael Flaherman AB 2833 letter-signed

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  1. RUKidding

    Thanks so much for this important update. Writing letters and emails as I type this. Disgusted with Chiang. What a sell out. Will do everything possible to oppose his run for Governor.

    Who’s buying Chiang off? What payola is he getting? It would be irresponsible not to speculate.

  2. flora

    Chiang’s bill does look like an attempt to hoodwink the public instead of reforming a broken CalPERS PE investment strategy.

    Thanks for your continued reporting on this important issue.

  3. Scrooge McDuck

    “And God said, ‘Let there be light,’ and there was light. God saw that the light was good, and he separated the light from the darkness.”

    Thank you Mr. Flaherman for a very well articulated letter.

    In case there was any doubt about the destructive real world implications of these “fees for nothing” feel free to read this article from last Sunday’s edition of the NYT.

    I spent a few minutes digging through SEC filings to find examples of ambulance companies owned by PE firms and came across this gem. Envision Healthcare (formerly Emergency Medical Services), until fairly recently owned by Clayton Dubilier & Rice, paid out $4.5 million in annual consulting fees, $40 in a one time transaction fee at acquisition, and $20 million to terminate the consulting agreement, to CD&R as a related party. That worked out to be approximately $70 million in fees for nothing, that were disclosed in SEC filing, who knows what the actual amount actually turned out to be, during the short period of time owned by CD&R.

    1. Sluggeaux

      Thanks for this post. As important as the Sacramento Kayfabe above is where the money is going. Rent-extraction machine Rural/Metro Ambulance was looted in 2013-2015 by Warburg Pincus; CEO Turbo-Timmy Geithner. Funny how criminal investigations of their shenanigans could never get off the ground…

  4. David Yuguchi

    I forwarded Mr. Flaherman’s letter to my Assemblyman along with my stated opposition to AB 2833.

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