In a Buyouts Magazine article earlier this month (paywalled), Sam Sutton did some sleuthing. He found out that CalPERS was the hidden hand behind an innocuous-sounding amendment to private equity transparency legislation in California that led one of the bill’s key proponents to call for a vote against it.
The bill, AB 2833, came out of a promise that California Treasurer and board member of the giant public pension funds CalPERS and CalSTRS, made last fall, to sponsor path-breaking private equity transparency legislation. Even though the initial version of the bill, released by its author Ken Cooley, did a good job of meeting Chiang’s pledge, it has now been amended to the point that it amounts to reform theater, and thus stands in way of progress. Both general partners and the captured limited partners would be able to tell the chump public that the issue had already been addressed.
We described three major shortcomings with the current version of the bill. They vitiate Chiang’s commitment to “ensure public pension funds and their trustees have the transparency they need to determine the value of private equity investments,” by providing for large gaps in information as well as obvious routes for general partners to circumvent disclosure.
Former CalPERS Investment Committee chairman and private equity executive, and now a visiting scholar at UC Berkeley, Michael Flaherman, confirmed our concerns in written testimony to the California Senate, in which he recommended against passing the bill in its current form. This is significant because Chiang’s office asked Flaherman to participate in the drafting of the original bill and some of his language was in it.
Sutton’s article proves what we had suspected: that CalPERS was pretending to back more transparency in public, but was working behind the scenes against it. From his article:
California Public Employeess Retirement System staff sought to weaken language in a bill requiring private equity firms to provide additional disclosure of fees and expenses..
CalPERS staff requested amendments requiring GPs to provide California LPs with just their pro-rata share of those fees, four sources with knowledge of the negotiation process told Buyouts….
Why CalPERS sought to limit disclosure of an earlier version of AB 2833 is unclear.
Mind you, that pro-rata language was the factor that led Flaherman to switch to being an opponent of the bill. And Sutton mentions another tactic that CalPERS opened up against the bill. We’ll show how that played out in a forthcoming post, since it illustrates how particular board members are acting as staff mouthpieces in defense of private equity.
And the article also makes clear that CalPERS was opposed to any bill that would result in more transparency:
While the bill offers marginal improvements in the reporting of fees, expenses and carry, CalPERS board member JJ Jelincic called the new version of the bill “worse than when they started amending it.”
The CalPERS staff’s “goal was to make the bill reflect our current reporting practices,” he said. “If the reporting practices were any good, we wouldn’t need the bill.”
Consider the sequence of events. The day after Chiang announced his plan to sponsor what he described as pathbreaking, comprehensive transparency legislation, CalPERS’ staff said it supported the bill. That was a very irregular move, as we pointed out at the time, since the board approves any official position on legislation, and that comes after staff analyzes the text of the bill and presents a formal recommendation.
Consider also that staff would not cross the state treasurer, who is far and away the most influential board member.
Given that we now have confirmation that CalPERS’ staff does not, and presumably never intended, to back legislation that would amount to real progress, what are we to make of CalPERS’ pretense that it was fully on board?
Since staff presumably has ready access to Grant Boyken, who is Chiang’s designee at CalPERS, a former CalPERS staffer, and the point person on the legislation, one can surmise that either:
Chiang was never serious about the legislation and CalPERS was fully aware of that, and thus knew it could have the best of both worlds: pretending to be on the right side of reform in public while undermining it in private or
CalPERS was convinced it could play Boyken and Chiang and Boyken knew so little about private equity that they were confident they and the public could be played with virtually no risk
The evidence supports the first conclusion, since Flaherman, who was ready to advise Chiang on the impact of proposed amendments, was frozen out of the process. And as we showed earlier, Boyken fiercely resisted Flaherman’s efforts, in a public board meeting in May, to get the board the information it needed to make an informed decision about the bill. Bear in mind that at this point in time, Flaherman had already seen possible amendments that included the pro-rata language he found so damaging to the bill. Staff sought the authority to negotiate amendments without telling the board what they might be. That would be fine if staff were operating in good faith, and it normally does in liquid markets. But private equity is a different kettle of fish.
Many of you have seen this clip before, but it’s worth reviewing in light of Sutton’s new information, starting at 26:22.:
Michael Flaherman, Visiting Scholar, UC Berkeley: I have one issue that I just wanted to raise, which is that I’m aware that there have been different versions, different proposed amendments floated around for this bill, some of which are very tricky and are intended to undermine the purpose of the bill.
And I was hoping actually that one of you might ask what I think is actually a very important question, which is are there any other changes to the latest amendment, proposed amendment, that affect the bill relative to last version that has been posted? Because Mr. Costigan has an excellent point, which is that there’s been no public opposition to this bill, but there is certainly a lot of unhappiness in the private equity industry and the effort has been to try to slip in innocuous-seeming language that has the effect of undermining the effect of the bill.
So if I were you, I would want to get reassurance and confidence that there is no other substantive change to the bill other than what’s already been discussed. So that, I just throw myself on your mercy and hope that one of you might ask that question before you vote. Thank you.
Investment Committee Chairman Henry Jones: Mr. Boyken.
Grant Boyken, Deputy Treasurer: Thank you. I’m not sure where that comes from. There’s been no tricky amendments. It’s been good negotiations between the Treasurer’s office and the author’s office. I mean, you’re exactly correct. We’ve seen no opposition on file. Nobody has talked to us. Nobody from industry has gotten to us. There was one point, when legislative counsel dropped our definition of related parties. There were a couple of other things that got amended.
Legislation, you know, sometimes the deadlines come quick. It’s an iterative process. Things aren’t perfect. But fortunately, it’s a long process that won’t finish until late in the summer. Plenty of time for input like we have today for CalPERS to come up with a reasonable though-out plan. So you know, I can assure this board that there’s nothing tricky going on behind the scenes.
Boyken jumped in to shut down questions by the board by firmly rejecting Flaherman’s concern that “tricky amendments” were in play. Yet Flaherman was accurate and Boyken was clearly lying to the board.
The CalPERS staff and Boyken/Chiang position are not only deceptive and a great disservice to CalPERS beneficiaries and California taxpayers, but they also are also reactionary. More and more industry insiders and experts are coming to the point of view that private equity needs to get on the transparency bus or it will be under the bus.
A few days after his article on CalPERS’ efforts to undermine AB 2833 ran, Sutton took the unusual step of voicing his disapproval in an op-ed. Remember that PE Hub is a trade journal, and specialist reporters seldom go up against perceived industry interests. Thus while Sutton is to be commended for speaking up, his article is also a sign that more and more people in private equity are coming to accept the need for greater disclosure. From his piece:
California Public Employees’ Retirement System staff fought to diminish the level of disclosure GPs would have had to provide under draft versions of a transparency bill making its way through the state senate.
CalPERS took several critical and groundbreaking steps to be more transparent in its disclosure of private equity data over the last several years. But this recent step was in the wrong direction…
In the past, CalPERS and other state and local pensions have argued that enhanced disclosure could limit their ability to invest with top-quartile managers. But GPs who spoke with Buyouts indicated that their firms could provide aggregate portfolio company fee data to LPs, though one said such an undertaking would be a “major hassle” for the firm’s accounting team.
Know what’s big hassle? Not understanding the full costs of your pension’s investments.
In a bit of synchronicity, Private Equity News (no online source) published an article the same day titled, Private Equity’s Great Divide: Transparency. Its subhead: Investors and regulators are scrutinising fees and calling for common standards. But the industry is resisting this campaign for transparency. A key section:
For decades, private equity has been left to its own devices, not only in setting fees and expenses but in reporting them. Now, the industry is under more pressure than ever to provide a fuller accounting of what it charges investors and portfolio companies. Firms are feeling the pinch on multiple fronts, through heightened scrutiny from federal regulators such as the Securities and Exchange Commission, an increasing chorus of investors clamouring for a single reporting standard and, more recently, state lawmakers pushing for rigid disclosure requirements.
Despite all of this, private equity firms have yet to embrace a common standard for how to report fees and expenses. The potential stakes are high. If the industry can’t find common ground, firms will have to provide reporting.
In other words, the footdragging by general partners and the limited partners that are acting as their allies has the potential to create far more complex and onerous reporting requirements than accepted the inevitable. And the article dares to mention the real elephant in the room:
At the same time, the battle cry for stronger reporting standards has galvanised groups that want fee data to be available to the public, raising questions over whether the pensions and endowments that are the industry’s backbone can withstand widespread scrutiny when private equity’s full bill is finally accounted for.
Translation: everyone knows the fees are egregious even if they don’t know exactly how high they are. But once enough evidence is out there so that the public can see how ginormous they are, it will be indefensible for the investors not to put up a serious fight to reduce fees. Investors are cowed by that prospect. But what they fail to appreciate is that the disinfectant of sunlight will give them vastly stronger support from the press, pundits, politicians and the public than they have now, tipping the balance of power more in their favor.
How You Can Help
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. Please forward this post to friends and family members in California and urge them to spend a few minutes to support this effort.
Please e-mail your Assemblyman and Senator (contact information here).
We also encourage you to cc Chiang and his deputy Grant Boyken on these message:
Finally, you can contact Governor Jerry Brown and urge him to veto AB 2833 if it gets to his desk. You can use this form to e-mail him (the topic “Legislation Issues/Concerns) looks like the best fit) or call his office at (916) 445-2841.
As always, thanks for your interest and support!