The California Public Employees’ Retirement System hopes to secure more fee cuts from private equity firms, following a deal it struck with Apollo Management in late April to shave up to $125 million in fees, according to CalPERS CIO Joseph Dear.
Pension funds and other investors have been able to wield increasing pressure on private equity funds to cut fees since the financial meltdown, as many investment firms have found it harder to raise fresh cash.
“It just drives me nuts when I think about managers who are generating profits off the management fees,” said Dear, speaking at a panel at the Milken Institute Global Conference in April. “That’s why this drive to get better terms is so fundamentally important.”
Dear added: “There’s never been a better time [for investors] to press their case, and if we don’t take advantage, it’s a missed opportunity.”
Apollo Management agreed to a deal with CalPERS to reduce fees for the pension fund giant—not for traditional private equity investments, but for funds that the buyout shop manages solely for the giant state pension fund. “That’s a significant step forward and we intend to take that to our other significant private equity relationships,” Dear said.
CalPERS and Apollo said that the agreement would “further align the interests” of the two institutions and “set a new standard among pension funds and their investment advisers.”
It just drives me nuts when I think about managers who are generating profits off the management fees. That’s why this drive to get better terms is so fundamentally important.
“We have had a very successful 15-year relationship with CalPERS,” Apollo’s CEO Leon Black said in a press release. Apollo manages close to $2 billion for CalPERS, according to a source familiar with the situation, which is separate from any money the pension fund has invested directly in Apollo’s funds. Under the deal, CalPERS is incentivised to invest more funds with Apollo, the source says
Separately, In March, Dear met some executives from the private equity industry at a closed door meeting organized by the Institutional Limited Partners Association (ILPA), which represents CalPERS and other LPs. ILPA has put forward a number of principles that it wants general partners to follow. Those include having the firms and LPs align their interests.
Also, the ILPA says that fees should not be excessive and that changes in tax law should not be passed on to investors in a fund, according to the ILPA website.
“My hope is that ILPA takes those [principles] and have a third party rate all the private equity managers on compliance with those principles,” Dear said.
That will help institutionalize private equity as an asset class and drive down the cost toward the point where the investor and the private equity firm make money at the same time, he said. —Megan Davies, Reuters