
Over the last couple of decades or so, state pension funds have become increasingly entwined with private equity funds, relying on them in times of low returns on bonds caused by the Federal Reserve keeping rates chronically low. Now, pension funds are realizing that the deals they made with private equity are perhaps not all they were cracked up to be, and low transparency from PE funds has become an annoyance pensions will no longer tolerate. Matt Wirz reports in The Wall Street Journal:
A group of U.S. pensions and other institutions is pushing private-equity firms to share more information on their fees and investment returns, in a bid to address simmering frustration with the industry’s disclosures.
The Institutional Limited Partners Association, a trade group that counts the retirement plans of public workers in California and Wisconsin as members, proposed this week new guidelines to standardize financial reporting by private-equity firms, people familiar with the matter said.
Public pension plans, university endowments and charitable foundations have about doubled their investments in private-equity funds since 2018, according to Preqin, a company that collects data on private funds. These institutions are among alternative investment firms’ biggest and most-loyal clients. North American private-equity funds now manage some $4 trillion in assets.
Pensions have turned to private equity to plug cash shortfalls for years, tolerating weaker reporting on their investments compared with public funds because most private funds generated higher returns. Now investors want more transparency.
Private investment firms tend to vary how much they disclose to clients based on how much they invest. The smaller the check, the less information. Many small and midsize pensions are left out of the loop, and even the big ones struggle to accurately compare performance of fund managers.
“I’m a big believer that sunshine is the best disinfectant,” said Scott Ramsower, head of private-equity funds at the Teachers Retirement System of Texas, which manages $200 billion of savings for its members. “We can then have much more detailed conversations with our [private-equity] partners and hopefully be putting pressure on them to really be thoughtful.”
Texas Teachers, the California Public Employees’ Retirement System and the State of Wisconsin Investment Board are members of the initiative’s steering committee. Representing the buyout industry on the committee are Vista Equity Partners, Cerberus Capital Management and Searchlight Capital Partners.
Some private-equity firms support the initiative, though its adoption still faces an uphill battle, people familiar with the matter said. More investors want to get into top private-equity funds than there is room for them, giving private-equity firms greater leverage at the negotiating table.
Private-equity assets managed for all types of investors have about tripled over the past decade, but the fees collected by these firms have risen sixfold, according to Preqin.
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