Photograph by Ken James — Bloomberg/Getty Images
By Dan Primack
July 1, 2015

In April, a senior staffer at the California State Employees’ Retirement System (CalPERS) told investment committee members that the $300 billion public pension giant “could not track” the incentive fees (i.e., carried interest) that it had paid out to private equity fund managers. Over the past week, I’ve severely criticized this response, suggesting that it reflected a massive breakdown in financial controls.

Now it seems that CalPERS is finally seeking to get the appropriate information.

Fortune has learned that the pension system yesterday sent out emails to all of its private equity fund managers, asking for the amount of carried interest paid — and, separately, the amount of carried interest accrued — by CalPERS since the inception of each private equity fund. The information is due by July 13, with CalPERS asking for detailed supporting documentation that will allow it to “independently recalculate and tie out the amount of carry and management fee.”

After reporting on the emails earlier this morning in our Term Sheet newsletter, I spent some time on the phone with Ted Eliopoulos, CalPERS chief investment officer, and Wylie Tollette, CalPERS chief operating investment officer (and the person who made the April comments about tracking carried interest). They both said that the timing of the emails were coincidental, and that they were part of a longer-term project in which CalPERS has been developing a robust, in-house reporting and monitoring system for its private equity investments.

So far this year, they added that 94% of their private equity partners have provided information on carried interest paid for distributions in 2015, but that the email requests are intended to fill in that extra 6% and generate historical data. As for why CalPERS only is asking for historical data now, neither one had a terribly good explanation. They stressed the lack of standardized private equity reporting, and that they “are not in the practice of doing back of the envelope math” for a portfolio of around 700 fund relationships.

But none of that explains why they couldn’t have worked out carried interest from audited annual financial reports in past years, and sent similar emails to those funds that didn’t break it out. In fact, multiple sources tell me that CalPERS did used to receive such information in confidential reports from an outside consultant, but that the contract was discontinued shortly after CalPERS installed a new private equity investment chief in 2011. Again, this is as much a CalPERS issue as it is a private equity issue, if not more so.

Eliopoulos and Tollette say that CalPERS plans to publicly disclose the aggregate carried interest data later this year, and believe other public pensions should do the same.

From my perspective, this disclosure could be a double-edged sword. On the one hand, I’m typically in favor of added disclosure. My only concern is that people may misinterpret the numbers, and view a large dollar amount as indicative of PE funds making too much money on CalPERS’s dime. The reality is that the more carry a system like CalPERS pays, it’s primarily reflective of higher returns (since carry is a percentage of investment profits). For example, you wouldn’t want to brag about paying zero dollars in carry, since all that means is that you didn’t generate positive returns on your investments. Therefore, it will be important for CalPERS to put the figure in the greater context of its returns — and to see how close it is to the market standard 20%.

But, to me, disclosure is secondary. The larger issue is that CalPERS, as a fiduciary for more than 1.7 million pensioners, is tracking its own payments. Better late than never…




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