By Ed Mendel
September 21, 2015

After the CalPERS staff gave the board a correction last week for providing misinformation about private equity fees, the board member who has been grilling staff on the issue walked out of a private staff meeting because he was not allowed to record it.

The nation’s largest public pension system, one of the first to invest in private equity firms and their lucrative leveraged buyouts, expected to be a leader again this year by launching a new fee tracking system after three years of development.

But when a question from board member J.J. Jelincic in April revealed that CalPERS did not know the amount of “carried interest” earned by its private equity firms, there was a small wave of criticism in the national media.

In the traditional “2 and 20” fee structure, the private equity firm gets to keep 20 percent of the profit after earnings reach a basic amount. This performance incentive is called the “carried interest,” a term said to date back to 16th Century sea voyages.

At a board meeting last month, Jelincic questioned staff at length about the 2 percent management fee. At one point the investment committee chairman, Henry Jones, threatened to rule him out of order.

After the meeting, Jelincic wrote a letter to Anne Stausboll, CalPERS chief executive officer, complaining that the private equity staff he questioned, Real Desrochers and Christine Gogan, gave inaccurate, evasive and condescending responses.

“Staff is perpetuating the talking points and mythology of PE fund managers, who are continuously — and largely successfully — trying to convince the limited partners (CalPERS and other institutional investors) that they receive a more favorable deal than they actually do,” Jelincic said.

His letter included an excerpt of his questions to the staff pointing out that a key reply by Desrochers was incorrect. Ted Eliopoulos, CalPERS chief investment officer, read a correction to the board last week.

“We were asked if a management fee is $100 and the fee to the portfolio company is $50 and there is a 100 percent offset to the limited partner, will the general partner (the private equity firm) ultimately collect $100,” said Eliopoulos. “The answer is ‘yes.’ We should have answered ‘yes’ instead of ‘no.’”

The Desrochers error and the Jelincic letter led to another small wave of criticism in the national media, notably in the Financial Times and Fortune magazine. CalPERS responded with a “For the Record” defense of its private equity investments, averaging 12.3 percent returns over the last 20 years.

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