Photogaph by Max Whittaker—Getty Images
By Dan Primack
November 24, 2015

The California Public Employees’ Retirement System (CalPERS) on Tuesday morning released data on how much investment profit it had shared with outside private equity fund managers, after having been criticized earlier this year for claiming to have been unable to track such payments.

The industry name for such shared profits are “carried interest,” and are negotiated before a private equity fund begins making investments. These are separate from management fees and other expenses that limited partners (e.g., CalPERS, et al) may be required to pay general partners (private equity firm), and are generally considered to strengthen the alignment of interests between both sides.

Moreover, there has been some concern that, by releasing this data, CalPERS would be assuming headline risk from readers who are shocked by the aggregate figures — even though larger carried interest payments typically mean that the limited partners have generated larger returns for themselves. After all, if you pay nothing in carried interest, it also means the underlying funds either lost money or were just barely in the black.

Back to CalPERS: The pension system, which is the nation’s largest with $295 billion in assets under management, reports that its active private equity fund managers have realized $3.4 billion in profit-sharing between 1990 and June 30, 2015. That is compared to $24.2 billion in realized net gains, which works out to an effective carried interest rate of just 12.3%. For the 2014-2015 fiscal year, the shared profit totaled $700 million on $4.1 billion in realized net gains, or a 14.6% effective carried interest rate.

For context, the industry standard for carried interest is 20%. That would suggest that CalPERS has been a savvy negotiator, but it’s also worth noting what today’s data dump is missing:

1. CalPERS only released data for active funds, as opposed to all of the private equity funds in which it has invested since 1990. Excluded are any fund positions that have been sold or liquidated. A CalPERS spokesman says: “We have limited recourse to seek the data from exited, inactive, sold, liquidated, etc. funds. We felt the best use of our time and resources was to focus on active funds – 98% of cash adjusted asset value is represented. And moving forward we will be consistent in that approach.”

2. We do not know actual carried interest structures for any of the funds, many of which might include preferred returns (i.e., hurdle rates). In other words, certain private equity funds only begin generating carry once they have returned the entire fund plus something like 8%. As such, the realized profit-sharing may be artificially low. Even without a hurdle rate, carry is rarely made effective until a fund repays its principle, meaning carried interest can be artificially low in a fund’s early years (something exacerbated by the pension system’s decision to only report active funds). This could be partially rectified if CalPERS also released data on accrued carried interest — something it requested from its fund managers earlier this year — but it is unclear if such figures will be forthcoming.

CalPERS is scheduled to host a media call later today, and we’ll update this post if anything of interest emerges.

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