A few weeks ago, Gretchen Morgenson of the New York Times wrote on how state-level bills to increase private equity disclosure, including California Treasurer John Chiang’s AB 2833, were being blocked or considerably weakened.
Apparently Chiang was not pleased at getting less than glowing press. His letter to the New York Times editor ran last weekend under the header, A Look Behind the Curtain:
In “Keeping Private Equity Shrouded in Shadows” (Fair Game, July 3), Gretchen Morgenson contends that the private equity fee disclosure legislation I am sponsoring in the California Legislature has been “watered down.”
Should Assembly Bill 2833 become law, it would impose the most robust transparency requirements in the nation on private equity firms. For the first time, California public pension funds will be allowed behind the curtain to view previously hidden fees and charges that are paid to general partners and related parties.
Ms. Morgenson cites the concern of a former Calpers board member that my measure presents “less than a full picture” because it discloses only the related-party costs allocated to California public pension funds. I am open to sponsoring future legislation requiring broader disclosure of related-party transactions affecting private sector or non-California investors.
However, today, I am more concerned that our pension fund members and taxpayers are given a full picture of their share of total investment costs. A.B. 2833 does that. This type of disclosure is crucial given that every dollar paid in fees is one less dollar available for promised benefits.
It’s difficult to know what to make of this.
Who is the audience? The New York Times is not all that popular in California. Most readers consume the online version, where letters to the editor are hard to find. In searches, the Morgenson article will be prominent, while this missive will be comparatively obscure. Perhaps the motivation was that in the event that members of the public or the legislature cite the Morgenson article, Chiang can point to his letter as a retort.
But more important, did Chiang even recognize that, even taking his letter at face value, all he was doing was whinging about the Morgenaon article rather than actually making a cogent argument about it?
The opening paragraph repeats Morgenson’s observation that the bill was “watered down” and never once disputes that. Even worse, Chiang makes an admission against interest, confirming an unnamed critic’s (private equity expert Michael Flaherman’s) claim that the bill is flawed by saying he is open to sponsoring a future bill that would provide for fuller disclosure. Why wait till then and not fix this measure?
In addition, the letter is misleading in claiming that AB 2833 would let public pension funds “view previously hidden fees and charges”. At best, it would allow them to “view some previously hidden fees and charges. We described three flaws in bill at length:
AB 2833 has gaping holes that will allow general partners to structure related party payments to escape reporting
AB 2833’s definition of “portfolio company” allows payment to be routed through other entities
Reporting is at far too high a level of abstraction to allow for verification or cross-checks
So Chiang’s defense boils down to “This bill is better than nothing”. But is even that weak claim true? For the reasons listed above, it’s very likely that it will represent no meaningful change. That’s before you get to the fact that, in the June CalPERS Investment Committee meeting, as we wrote today, the board voted for an amendment, which if passed, would weaken the bill even further. Yet if AB 2833 is enacted, it will allow both general partners and limited partners to claim they’ve made meaningful steps, and thus allow them to resist better legislation as unnecessary until it’s become clear this bill has failed, which will take at least a few years.
The real tell that AB 2833 is no threat to private equity, as an effective bill would be, is the lack of opposition. Nary a vote has been cast against it. It would be one thing if Chiang and the bill’s author Ken Cooley had stuck with the original strong version, had forced opponents into the open, and made them show their faces and present their arguments. The more the fatuous defenses of private equity secrecy are on public view, the harder they are to support. And if Chiang lost, he could point to a hard-fought battle and demonstrate how powerful the private equity industry is, which is in and of itself a cause for concern.
But whether due to lack of commitment, habit, or not understanding their opposition, Chiang and Cooley decided to handle as as much as possible behind closed doors, a game the private equity industry was sure to win. Once again, secrecy remains private equity’s best friend.