Calpers Puts Pressure on Private Equity Funding and Fees

While the government puts regulatory pressure on publicly owned financial institutions to cut compensation, a backlash with even more potential power seems to be underway in the private equity world. Calpers, the largest U.S. pension fund, has cut funding for private equity by 62 percent for the first seven months of the year, to $2.93 billion from $5.93 billion, Bloomberg reports.

"Joseph Dear, Calpers’s chief investment officer, said he may extend his review of the plan’s 'relationship' with Leon Black's Apollo to other private-equity managers," Bloomberg says. "After contributing to the record $1.2 trillion raised by buyout funds this decade, many pensions, endowments, and wealthy families suffered their worst losses last year. Now fund managers face mounting pressure from those investors, known as limited partners, to deploy cash more judiciously and rein in fees that transformed founders of the largest funds—Blackstone Group LP, KKR & Co. LP, and Carlyle Group—into billionaires."

It just goes to show that, when the free market does impose discipline, it does so with a vengeance. The government made a lot of waves by pushing bailed-out banks and automakers to cut total compensation for their top-25 executives by 50 percent. It says those guidelines should be followed by other banks that didn't receive bailouts, but it can do little beyond jawbone those institutions. By way of comparison, the forces unleashed by Calpers are potentially much broader and more powerful. The typical fee structure, in which private equity firms get a management fee that equals 2 percent of assets plus 20 percent of the profits, has been under pressure for some time. The changes that Calpers wants could be terminal for many firms that can't produce top results. Real consolidation in private equity may happen yet.