Tags: Calpers | Carried-Interest | Investors | Pension

Calpers Carried-Interest Data May Hold 'Shock Value' for Public

Image: Calpers Carried-Interest Data May Hold 'Shock Value' for Public
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Wednesday, 07 Oct 2015 11:02 AM

Private-equity firms are bracing for Calpers to disclose their profits from investing the pension’s money, the sort of gains that have triggered a debate over why some Wall Street companies pay lower tax rates than most American workers.

The $291 billion California Public Employees’ Retirement System is aggregating data on so-called carried interest earned from buying and selling companies that is taxed as capital gains.

It shares those proceeds with managers of more than 700 private-equity funds, including those run by Carlyle Group LP, Blackstone Group LP and Apollo Global Management LLC. Staff members will present the findings to the governing board in November.

The move by the nation’s largest public retirement fund could spur similar revelations from pensions nationwide as Wall Street’s favorable treatment has drawn scorn from presidential candidates of both parties.

“Because of their size, Calpers often is a trendsetter in a number of areas, including investment practices,” said Keith Brainard, research director at the National Association of State Retirement Administrators. “So an effort on their part to review private-equity terms and costs is likely to encourage public-retirement systems to follow suit.”

President Barack Obama wants to tax carried interest as ordinary income at rates up to 43.4 percent, instead of as capital gains at 23.8 percent. Democrat Hillary Clinton and Republicans Donald Trump and Jeb Bush have said they would rein in the discount.

Private equity managers typically charge their investors a 1 percent to 2 percent management fee that is taxed as income. They generally keep 20 percent of the profits, which are taxed at capital-gains rates. Firms also sometimes waive some of the management fee in exchange for an equivalent amount from a transaction such as the sale of a company, lowering their tax bills even more.

Shock Value

The numbers add up.

“Private equity is concerned about the shock value,” said Victor Fleischer, a law professor specializing in tax policy at the University of San Diego. “You have to worry that if you’re Calpers, what the response is going to be. At the end of the day, this is public money that’s being invested.”

The pension, which is responsible for the retirement savings of its 1.7 million members, has drawn criticism for its $113 billion unfunded liability, the gap between promised benefits and its projected value. Calpers has been trying to reduce risk and costs after the global financial crisis shrank it by a third, meaning that taxpayers had to contribute more to cover losses.

Private equity returned 13.3 percent after fees for Calpers in the decade ending June 30, 2014, while the overall return was 7.2 percent, said James Maloney, a spokesman for the Private Equity Growth Capital Council, a Washington trade group. For the year ending March 31, Calpers said it earned 8.9 percent from private-equity investments, among the highest of its asset classes as the total fund returned only 2.4 percent.

“Private equity is a top performer, even after fees, for pensions, so I don’t think it will have much of an impact,” Maloney said.

Bigger Profits

Some public pensions already report carried interest, including New Jersey’s $79 billion fund. It reported that it paid about $600 million in private-equity fees and incentives in 2014, with $334.8 million going to carried interest, according to a January report from the New Jersey State Investment Council.

Industry executives say that carried interest is a form of profit sharing and that when it’s high, the firm did well by the investor.

“Carlyle is proud to have delivered exceptional rates of returns for California pensioners for nearly 20 years,” said Christopher Ullman, a spokesman for the world’s second-largest manager of alternative assets behind Blackstone. “Because our interests are aligned with Calpers, we only succeed if they succeed.”

Sharing profits is a typical practice in the negotiated marketplace of private equity, Calpers spokesman Joe DeAnda said in a statement.

“The disclosure of carried interest paid is a win for our stakeholders, as it will help bring transparency to an area of this asset class that lacked it before, and may help drive better economics for Calpers,” he said. “Of course, we would prefer to have 100 percent of the profits, but in the private-equity industry that is not an option.”

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Private-equity firms are bracing for Calpers to disclose their profits from investing the pension's money, the sort of gains that have triggered a debate over why some Wall Street companies pay lower tax rates than most American workers.The $291 billion California Public...
Calpers, Carried-Interest, Investors, Pension
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2015-02-07
Wednesday, 07 Oct 2015 11:02 AM
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