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Suit Seeks Details of CalPERS Payments

Fees to hedge funds and venture capital firms should be made public, a media group says.

September 08, 2004|Tom Petruno | Times Staff Writer

A group representing California news organizations sued the California Public Employees' Retirement System on Tuesday, demanding that the giant pension fund reveal the money management fees it pays to individual venture capital firms and hedge funds.

The suit places CalPERS on the other side of the table on the hot-button issue of disclosure: The $166-billion fund has been among the most vocal big investors nationwide in agitating for companies to be more forthcoming in their financial accounting and how their boards make decisions.

Despite that policy, CalPERS in June refused a request by the California First Amendment Coalition that it itemize what it pays venture capital firms and hedge funds that manage nearly $9 billion in CalPERS assets. In part, the fund cited competitive issues, saying that some investment managers might decline to do business with CalPERS if their fees were made public.

The coalition filed suit in state Superior Court in San Francisco to force the disclosure, arguing that "the public should know how CalPERS invests the billions of dollars entrusted to it, and who charges how much to manage that money."

"CalPERS is always pushing, pushing, pushing for every company it invests in to be more transparent," said Peter Scheer, executive director of the coalition, which counts news media companies -- including The Times -- as members.

The fund, he said, "owes it to the public to disclose these fees and where the money went."

Such disclosure could "ensure that CalPERS doesn't invest money as a result of patronage or as a way of rewarding politically connected money managers who contribute to the government officials on CalPERS' board," the suit said.

In a statement, CalPERS did not address the question of political patronage but said it remained opposed to detailing its venture capital and hedge fund fees.

"The public's overriding interest is to obtain high returns from CalPERS investments," said Mark Anson, the fund's chief investment officer. "Disclosure of this information would have a chilling effect on public pension funds' ability to generate substantial private equity returns."

Private equity is a broad term used to describe investments made by venture capitalists and buyout funds in nonpublic companies. The goal of such investments is to reap large payoffs by eventually selling the companies or taking them public.

CalPERS and other big pension funds have channeled large sums into private equity firms over the last decade. CalPERS said it had about $8 billion invested with venture firms and buyout funds, and expected to more than double that over time.

Hedge funds are investment firms that seek to beat average stock and bond market returns by using often complex trading strategies. CalPERS has almost $700 million invested in hedge funds, and expects to raise that to about $1 billion.

Because of its size, CalPERS, like most pension fund giants, "indexes" the bulk of its assets -- meaning it seeks to merely duplicate the returns on broad stock and bond market gauges such as the Standard & Poor's 500. Indexed portfolios cost relatively little to operate because they basically just buy and hold.

Pension funds have turned to venture investors and hedge funds as ways to boost overall returns. For their efforts, venture investors and hedge funds typically charge substantial fees.

CalPERS said the fees and other expenses for running its entire portfolio totaled $462 million in fiscal 2002, the most recent year for which it could provide a breakdown. Of that total, $187 million was paid to venture and buyout firms and $5 million to hedge funds, CalPERS said.

The coalition's suit noted that more than 40% of CalPERS' investment fees in 2002 went to operators of venture, buyout and hedge funds, which in total accounted for less than 5% of CalPERS' assets.

"The public has a right to know not just the management fees of CalPERS' overall portfolio, but also whether certain funds have overcharged CalPERS or charged too much money for too little performance," the suit said.

CalPERS' Anson said state law permitted the fund to keep certain information secret if disclosing the data would hurt CalPERS' competitive position.

"If this information is publicly disclosed, we believe CalPERS will be shut out of top-tier investment funds," Anson said.

The case echoes other suits that have been filed against CalPERS and the University of California since 2002 demanding that they detail the performance of their venture-capital portfolios. CalPERS and the UC system fought those suits but lost in court.

Venture capitalists, in particular, historically have jealously guarded information about their operations. However, since CalPERS and the UC system were forced to reveal their venture returns last year, a predicted wholesale cutoff of the funds by the venture industry hasn't occurred.

The California First Amendment Coalition's Scheer said the general range of venture firm and hedge fund fees already was well known: 1% to 3% of assets managed, plus 15% to 30% of any profit generated.

He said that disclosing the specifics would not be revealing "trade secrets," a term CalPERS used in its initial rebuttal of the coalition's requests.

If CalPERS and other large pension funds as a group disclose the fees they pay, venture firms and hedge funds will have to accept it as standard practice, said Scheer, whose 16-year-old group says it seeks to increase public access to government.

"We think over time the marketplace itself is going to demand this disclosure," he said.

A spokesman for state Treasurer Phil Angelides, a CalPERS board member, said the treasurer had not seen the suit, but that "as a matter of principle [Angelides] favors disclosure and transparency consistent with our fiduciary obligation to pensioners and taxpayers."

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