Copyright 2004, San Jose Mercury-News

CalPERS settles lawsuit over disclosure of fund fees

(San Jose Mercury News 12/8/04) -- California's giant pension fund, CalPERS, on Tuesday announced a settlement to the case filed against it by the California First Amendment Coalition, agreeing to disclose information about the money it pays to the managers of its private investments.

According to the settlement, which was expected, CalPERS has disclosed the management fees it pays to individual venture capital, hedge and other private equity funds in which it invests. The information covers 2001 through 2003, and CalPERS will disclose information for 2004 and 2005 as it becomes available.

The settlement has revealed that CalPERS pays just over $200 million a year in management fees to 416 private equity funds in which it has invested $13.5 billion and plans to invest $21.1 billion. The First Amendment Coalition argues that CalPERS is paying too much in fees, which CalPERS disputes.

The settlement is also significant because CalPERS is considered a bellwether of investment trends in the venture world.

The deal allows CalPERS to avoid disclosing the exact terms and conditions of the funds it invests in, including for example the exact percentage of the fund the fees represent. It did so to placate its fund managers, who might move to eject CalPERS as an investor if they feel it reveals too much information.

Both sides said they were happy with the compromise: ``These disclosures are a big step toward more openness and greater public understanding of how the nation's largest public pension fund invests its money,'' said First Amendment Coalition Executive Director Peter Scheer.

``The disclosure of this information strikes the appropriate balance,'' said Peter Mixon, general counsel for CalPERS.

Only time will tell how venture firms will react to the disclosures. James Wei, partner at Worldview Technology Partners, said the public shouldn't look at the dollar amount of the fees and assume they're used for pocket money, or playing golf. At Worldview, Wei says he spends 40 percent of fees on global services to help start-ups grow more quickly, both here and in places like Japan and China.

In its analysis of the fee disclosures, the First Amendment Coalition estimates that CalPERS is paying some ``hefty'' management fees. In general, CalPERS is giving away 25 percent of its share of profits in the form of ``carried interest,'' compared with an average industry average of about 20 percent, the coalition said.

CalPERS spokeswoman Patricia Macht said the coalition's calculations are made on insufficient data, and made ``zero sense.'' However, she did not say exactly how much of its profits CalPERS gives away. She said CalPERS did not believe the fees are ``hefty.''

Here's how fees can sometimes be misleading. In 2002 and 2003, CalPERS paid Worldview's Fund IV more than $300,000 in fees, while CalPERS got no profits in return. However, Fund IV, raised in 2000, is still a relatively young fund. Worldview has pumped money from it into dozens of start-ups, some of which are only now beginning to bear fruit. Typically, over a fund's 10-year life, fees will decline each year, while money returned to CalPERS grows.

By Matt Marshall