New York Times’ Gretchen Morgenson: Private Equity Transparency Bills, Including California Treasurer Chiang’s AB 2833 “Hit a Wall”

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Last fall, California Treasurer John Chiang said he would sponsor private equity legislation that would provide investors in private equity like the giant public pension funds CalPERS and CalSTRS, on whose boards he sits, to combat the problem that, in his words, “Investors pay excessive fees to private equity firms and do not have sufficient visibility into the nature and amount of those fees.” While Chiang backed the Institutional Limited Partners Association effort to increase and standardize fee disclosure, he said more needed to be done.

While the initial version of his bill, AB 2833, did a good job of delivering on his promise, subsequent amendments have weakened it so much that we have urged California readers to contact their state Senators and Assemblymen to oppose the bill in its current form as being an empty gesture as opposed to real reform. As we wrote shortly thereafter, one of the experts who provided some of the text of the original bill and was curiously frozen out of the drafting process, Michael Flaherman, in his written testimony to the chairman of the Senate Committee on Public Employment and Retirement, Richard Pan, stated that “….it would set back the cause of private equity transparency for the bill to be enacted as currently written.

Over the weekend, Gretchen Morgenson of the New York Times confirmed these readings of the sorry state of AB 2833 in a broader article on stymied private equity reform efforts. From her column:

It began last year as a promising push by a few states to require private equity firms that invest on behalf of public pension funds and university endowments to be more forthcoming. But the effort has hit a wall as bills in California and Kentucky intended to shed light on fees and practices at these powerful firms have been either killed or watered down.

One of the bills proposed in California would have required only modest disclosures: the publication of a handful of pages from confidential limited partnership agreements. It was shot down.

Even worse, another private equity transparency bill in the state was recently amended to eliminate disclosures about related-party transactions between private equity firms and the portfolio companies they oversee. Fees paid by portfolio companies to private equity funds ultimately come out of the pockets of fund investors, so more sunlight in this area would have been beneficial.

Needless to say, the bill Morgeenson mentions in her third paragraph is Chiang’s legislation, AB 2833.

Mind you, it would be one thing if Chiang had made a serious effort on behalf of a strong version of the bill, particularly since he has put AB 2833 first on his list of “must pass” bills for this year. But as we’ve indicated, Chiang’s actions make clear that he is far less interested in having the pension funds to which he has a fiduciary duty understand the true costs of investing in private equity than making enough of a show so as to get good headlines from the not-finance-savvy in-state media.

Chiang didn’t even begin to put up a serious fight for a strong version of his bill. Worse, as we’ll discuss in more detail, hopefully this week, his office actively misled the CalPERS board and failed to challenge false information provided by staff. And mind you, this is a classic case of the dog that didn’t bark. There was no opposition by the private equity industry. They knew they could rely on their stooges at the public pension funds to do their dirty work, and that Chiang lacked the know-how and the interest to push back.

Not only did Chiang not fight, he didn’t even go through the pro forma efforts to show he cared about the bill. As the most powerful and busiest member of the CalPERS and CalSTRS board, the Treasurer has his deputies handle most board meetings on his behalf except when he wants to signal that he regards the matter at hand as important. Then and only then, he will attend to vote in person and participate in the discussions as necessary.

At both CalPERS and CalSTRS, Chiang did not attend the board session when AB 2833 was to be voted on by the board. The board approves official positions on pending legislation. If Chiang had been serious about wanting an effective bill, and sending a message to his fellow board members and staff, the bare minimum step would have been to attend that section of each board meeting and make a statement of principles that needed to be embodied in his measure for it to be effective.

The fact that Chiang didn’t make even these gestures virtually guarantees that he did not push behind-the-scenes for a strong bill at CalPERS and CalSTRS, where he has ready access and clout. It similarly means it is highly implausible that he did any arm-twisting at the other big public pension funds that would need to be won over, LACRES (Los Angeles City Employees’ Retirement System) and LACERA (Los Angeles County Employees Retirement Association).

Reader David Yuguchi posted a message that his sister, a CalSTRS beneficiary, received from Chiang’s deputy, Grant Boyken, in response to his e-mail to his assemblyman that cc’d the Senate committee members and Chiang’s office:

Thanks for your input. I urge you to think for yourself and ask Ms. Smith why she falsely accuses those who are doing the most to shed light on private equity fees of “gamesmanship ” whIle she ignores all of those who are doing nothing to further the cause.

The current language of AB 2833 is the result of hours of discussion and negotoation among the Treasurer’s office, legislative staffers and public sector labor representatives. The bill, if passed, will put California far in the lead of other states in terms of requiring greater transparency of alternative investment fees.

The “related parties” definition is wordy and complex as Ms. Smith suggests. I agree. We gave this a great deal of thought, however, and discussed with stakeholders. In the end, we used the definition adopted by the International Limited Partners Association (ILPA). This made sense given that the definition is comprehensive and that the ILPA fee disclosure template is emerging as an industry standard. No one person gets to make law. It’s an open and public and iterative process. No one has unilateral authority to dictate the language of legislation.

If you have specific recommendations regarding the language of the bill we would very much like to hear what those are.

Fortunately, the bill passed through the Assembly and through its first senate committee hearing this week.

John Chiang has worked tirelessly throughout his public career to shed light on government spending. AB 2833 is one more example of that track record. To oppose AB 2833 is to support the status quo of opacity with respect to private equity fees.

Please share with your brother. And again, please share your specific concerms and recommendations with us.


If you read the entire reply, you’ll see Boyken contends that “stakeholders” provided input when in fact those “stakeholders” consisted of captured public pension funds, unions (to our knowledge, only one took any real interest) and legislative staffers. In other words, beneficiaries and taxpayers were kept well away from the process. No doubt, the claim wil be made that they were “represented” via their legislators, but they lack expertise and the bill was herded through the Assembly so as to keep the public from weighing in.

It’s also troubling to see Boyken call the Institutional Limited Partners Association the “International Limited Partners Association.”

Here is Mr. Yuguchi’s reply:

Mr. Boyken:

Thank you for responding to me and my sister regarding AB 2833.

We are independent thinkers and are not being led around by the nose by Ms. Smith or anyone else. I have no insight as to Ms. Smith’s motivations, intentions, or why she does, or doesn’t do, anything. We merely are impressed by Ms. Smith’s and Mr. Michael Flaherman’s concerns about the apparent capture of the pension market by private equity firms and their abuse of this system of investment which puts public employee pension investment funds at risk by egregious, unsubstantiated, and secret fees paid at CALSTRS and CALPERS’s expense, as well as by the less than impressive returns on investment that PE firms actually deliver. Tying all of this together is the fact that California’s investments portfolio which doesn’t even allow for a proper evaluation of the propriety of even using PE. Are we really getting our money’s worth?

Your discussion of the definition of “related parties” misses the point that Ms. Smith raises: it is deficient in providing the protections need to insure the complete reporting of all payments to everybody involved. If you think that that is not the case, fine. But making the excuse that, well, everyone else does it this way, is not very reassuring.

As for the specific recommendations which you kindly invited, I have one:

(4) The public investment fund’s pro rata share of aggregate fees and expenses paid by all of the portfolio positions companies held within the alternative investment vehicle to the fund manager or related parties.

The legislation would have a markedly positive impact if the text in red were stricken so that each investor would be given information about the total amount of related party transactions received by the fund manager from portfolio companies. An investor knowing its pro rata share does not allow it to impute the total related party transaction value, which is extremely troubling and easily correctable by a small change to the language. The whole point of this legislation is more transparency. My suggestion provides more transparency.

Thank you for your attention to this very important matter.

Best regards,

David Yuguchi

Mr. Yuguchi has said he’ll let us know what kind of response he receives.

More readers, including Kim Kaufman, RUKidding, john k, oceaniris, and others who have e-mailed me privately, have said they’ve contacted their representatives and/or Chiang’s office. Thanks for your help!

And if you are in California, you can still weigh in, since the bill is working its way through the Senate. Please e-mail your Assemblyman and Senator. 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. You can find (their contact information here)

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

Thanks again!

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  1. TheCatSaid

    “But as we’ve indicated, Chiang’s actions make clear that he is far less interested in having the pension funds to which he has a fiduciary duty understand the true costs of investing in private equity than making enough of a show so as to get good headlines from the not-finance-savvy in-state media.”

    Really? You’re too kind. To me, Chiang’s actions make clear that he is far less interested in helping the pension funds to which he has a fiduciary duty understand the true costs of investing in private equity than making enough of a show so as to get good headlines and ensure future political contributions from the financial sector (such as fund GPs and their BFFs) to generously support his ambitions for elected public office.

    If Chiang had any interest in supporting transparency he would have shown up in person, and would have fought for even more effective language than what was in his original proposal. Instead he did the opposite–he didn’t bother to show up, didn’t defend his original wording (as if words don’t matter), and didn’t try to make it stronger. He folded completely, yet works for press coverage to try to make it look–deceitfully, IMO–as if he had tried.

    Chiang’s (and Boyken’s) going along with wording suggested by the ILPA–which NC has previously revealed to be a GP-funded organization–shows Chiang is captured by the industry he is supposed to regulate and supervise through his Board positions. Maybe Boyken is also hoping that playing along will be good for his career, too.

  2. TheCatSaid

    All public pension fund Board members–in CA and elsewhere–should be judged according to how effectively they are advancing genuine transparency in a way that can be meaningfully understood by pension beneficiaries and the general public.

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