This week, the Wall Street Journal reported that CALPERS, the $315B retirement system for California Public Workers, is studying dramatic changes to how it invests in private equity.
As a quick primer, private equity funds largely take money from pension funds and endowments and use that money to buy private businesses. The objective is to buy companies for a discount, then give them advice and resources, with the goal of eventually re-selling them to someone else for a handsome profit. Although Mitt Romney's firm (Bain Capital) was heavily criticized for this behavior in the 2012 Presidential Campaign, private equity funds can deliver a lot of value to their investors. It seems fair that they want to be compensated for that value.
Investment fees aren't chump change -- in the case of CALPERS alone, private equity funds earn about $2,000,000,000 per year in fees for investing the retirement savings of public employees.
Now the question CALPERS is asking is: are we getting our money's worth? Last year, CALPERS asked the same question about hedge funds, and decided no, the fees were not worth it -- coming to the same conclusion as the New York Retirement System.
But private equity is a little more complicated because private equity funds have traditionally outperformed other investments. Not to mention it would be fairly hard for pension funds to ignore all companies that haven't yet been listed on a public stock exchange.
CALPERS investment performance by asset class for the previous 20yrs
As a result, unlike its approach with hedge funds, it doesn't look like CALPERS is looking to cut off private equity investments altogether. Instead, CALPERS is considering whether it should build and/or buy its own private equity firm so it can control costs more effectively. An added bonus: as a subsidiary, it wouldn't have to disclose the salaries of its investment managers. The thought is that this would give CALPERS more leeway to competitively compensate investment professionals without public backlash. This way CALPERS could earn similar returns, but pay less than the 7% in fees.
This is a great step in the right direction. We want to thank CALPERS for continuing to push for fee transparency and accountability in the finance industry.
At Landed, we believe that with lower performance expectations for investments across the board, the fees you need to pay to earn those returns become increasingly important. That's why we've designed all of our investment products with fees in mind -- our investors pay only a nominal management fee on their investments.