Copyright 2004, Sacramento Bee

CalPERS to reveal venture-capital fees

(Sacramento Bee 12/8/04) -- The giant California Public Employees' Retirement System agreed Wednesday to a groundbreaking deal that reveals the millions it pays in fees to venture capital firms.

The out-of-court pact with the California First Amendment Coalition sheds further light on the high-risk private equity industry and could pressure other public retirement funds to follow suit, according to financial experts and industry officials. But they also warned that disclosure would send a chill through the venture capital world and possibly shut CalPERS out of lucrative investments.

CalPERS will detail what it pays annually to more than 300 private equity and hedge fund managers. It also will disclose profits. Previously, the fund reported only the total amount of fees and earnings.

CalPERS released figures from 2001 to 2003 and has agreed to disclose fees for 2004 and 2005.

"For the first time it will make it possible to scrutinize who is getting paid and how much," said Peter Scheer, executive director of the San Rafael-based First Amendment Coalition, a public interest group whose members include scholars and news organizations such as The McClatchy Co., parent of The Bee. "Within a year, most of the public pension funds will fall into line."

CalPERS general counsel Peter Mixon said the settlement satisfies disclosure laws while protecting sensitive information.

"The disclosure of this information strikes the appropriate balance between the public right to access information and continuing ability of CalPERS to invest in these asset classes," Mixon said in a statement.

The documents show Cal-PERS pays more than $200 million a year to private equity funds. Last year, CalPERS paid $257.3 million in fees and received $483.9 million in profits.

Lombard/Pacific Partners received the largest fee in 2003, $8.1 million. Since 1995, the pension fund has invested $347 million in the firm.

Locally, American River Ventures in Sacramento was paid $792,790. The largest gain, $42.5 million, came from Welsh, Carson, Anderson & Stowe VII, followed by $31.9 million from Lombard/Pacific.

CalPERS, the nation's largest public pension fund with $177.8 billion in assets, has committed $21.1 billion for private equity investments and $2 billion to hedge funds over the years.

The coalition, in suing Cal-PERS for the information this summer, argued that disclosure would help determine whether the giant fund is paying too much. At the same time, Scheer said, it's now possible to compare how much firms make in fees with their contributions to politicians serving on the CalPERS board.

Scheer said three Yucaipa Cos. funds got a combined $8.7 million in fees last year. State Treasurer Phil Angelides, a Cal-PERS trustee, has received political contributions from the head of the firm. Another trustee, former San Francisco Mayor Willie Brown, has done work for Yucaipa, he said.

Investment experts say analyzing fees is complex because final gains typically take seven to 10 years to realize.

"It appears to be very difficult to look at the information Cal-PERS is providing and do any critical analysis," said Paul Lapides, director at the Corporate Governance Center at Kennesaw State University in Georgia. "These businesses are about the growth in the value of the investment. You're much more concerned about your overall returns."

Corley Phillips, a partner with American River Ventures, called the settlement reasonable and supported more visibility.

But Phillips said CalPERS will be pressured to disclose other information and put firms at a competitive disadvantage. Two years ago, CalPERS settled a lawsuit by agreeing to release information on each private equity investment, including internal rates of return.

"The very best people in the industry have the choice of who to do business with. The very best funds are refusing to take money from CalPERS," Phillips said.

Last year, Sequoia Capital dropped the universities of Michigan and California from its latest fund because the Silicon Valley firm didn't want to disclose financial performance.

By Gilbert Chan