Private-Equity Funding Plunges 62% at Calpers Amid Fee Review
By Cristina Alesci, Jonathan Keehner and Jason Kelly
Nov. 18 (Bloomberg) -- The biggest U.S. pension plan doled out 62 percent less cash to buyout companies in the first seven months of the year and pressed for fee cuts as firms, including Apollo Management LP, struggled to revive dealmaking.
The California Public Employees’ Retirement System wrote checks for $2.23 billion to the firms through July, compared with $5.93 billion during the same period last year, according to documents prepared for Calpers’s investment committee meetings. 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.
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.
“You’re in a period where performance is poor and, particularly for the big guys, it’s coming home to roost,” said Steven Kaplan, who teaches a course on private equity at the University of Chicago Booth School of Business. “When performance is poor and money is scarce, the limited partners have the power.”
The investors in a private-equity fund agree to make a set amount of money available over the life of the fund. As the buyout firm makes acquisitions, it requests the cash from the partners to fund their share of each deal. While the firm has the right to call capital as needed, the limited partners may cut commitments to future funds if they disagree with how the firm spends the money.
Apollo Review
Since Dear, 58, was named in January to join Calpers, Apollo requested $94.6 million for investments in the seven months through July, compared with $1.43 billion during the same period last year, according to the Calpers documents.
Calpers has committed more than $4 billion to Apollo, of which $943 million remained untapped by the New York-based firm as of June 30, according to the pension plan’s Web site. The California fund plans to push Apollo to forgo a portion of that and lower its fees, the Wall Street Journal reported Nov. 13.
Private-equity firms typically charge investors a fee equal to 2 percent of assets under management and take 20 percent of all profit they generate.
‘Only Natural’
The review comes as Apollo aims to take advantage of the stock market recovery to boost its market value, according to the Financial Times. The firm, which is currently traded on bank-run platforms such as Goldman Sachs Group Inc.’s GS TrUE, plans to list its shares on the New York Stock Exchange in the coming weeks, the FT said, citing unidentified people familiar with the situation.
“We may examine other managers in the same way we are looking at Apollo,” Dear, who oversees investments for 1.6 million state government workers, said in an interview. “Many managers have 2006 and 2007 vintage funds that need restructuring and reworking. It would only be natural for a new chief investment officer to review those relationships.”
Money called by Washington-based Carlyle, the world’s second-largest private-equity company, fell by 55 percent in the first seven months of the year, to $206.5 million, according to the Calpers data.
Record Years
Christopher Ullman, a spokesman for Carlyle, and Steven Anreder, a spokesman for Apollo, declined to comment on the Calpers figures, as did Christine Anderson, a spokeswoman for New York-based Blackstone. Anreder didn’t return calls placed after hours seeking comment on the FT report.
Private-equity managers announced a record $1.6 trillion worth of transactions from 2005 to 2007, before the global credit contraction stalled takeovers and halted sales of companies the firms had prepared for divestment.
Calpers committed $25 billion under Dear’s predecessor, Russell Read, to private-equity funds started in 2006 and 2007, more than four times the amount offered to funds formed in the two previous years. The pension fund posted the worst annual performance since its creation in 1932 in the year ended June 30, as assets dropped by 23 percent. Alternative investments, such as private equity and hedge funds, fell 31 percent.
Profits Shrink
Profits distributed to investors this year have been scarce, even when compared to the smaller capital calls from funds. In Calpers’s case, distributions from fund managers, known as general partners, were $437.5 million for the first seven months of 2009 compared with $2.45 billion for the same period a year earlier.
Private-equity investors have been hit by a combination of factors, including an overall decline in asset values, a lack of distributions from earlier investments and relatively low returns from more recent buyout funds, said University of Chicago’s Kaplan.
“It’s a triple whammy,” Kaplan said.
Private-equity firms still have a total of $400 billion in unspent, committed capital, according to researcher Pitchbook Data Inc. in Seattle. Calpers said its general partners can draw from a pool of $23 billion.
The decline in private-equity contributions is skewed by two factors, Calpers spokesman Brad Pacheco said in an e-mail. A 77 percent drop in dealmaking in the first seven months of the year meant managers had less need for capital. Calpers also agreed to larger-than-average one-time contributions in 2008, he said.
Cutting Commitments
Apollo called about $2 billion last year, according to the Calpers documents, more than Carlyle, TPG and Blackstone combined. The firm in December reached a $1 billion settlement related to the failed $6.5 acquisition of Huntsman Corp. by Hexion Specialty Chemicals Inc. Apollo in March agreed to inject $200 million into Hexion.
“Firms could be calling less cash because of pressure from limited partners or because they’re doing fewer deals, and it’s probably a combination of both,” said Pavel Savor, a professor at the University of Pennsylvania’s Wharton School in Philadelphia. “Limited partners can threaten to not re-invest with a manager, which is a concern for bigger private-equity firms.”
Dear, who joined Calpers from Washington State on March 2, has cut commitments to new funds to $1.13 billion in the first six months of the year, from $12.2 billion in all of 2008 and its all-time high of $15.9 billion in 2007, according to data on its Web site.
‘Unspent Capital’
“Managers still have plenty of unspent capital to use before we commit new funds,” Calpers’s Pacheco said. Contributions to managers from existing commitments will grow over the year as the rising stock market and a recovery in debt markets fuel new buyouts, he said.
The Standard & Poor’s 500 Index has rallied 64 percent from its March 9 low. Loan prices as measured by S&P/LSTA U.S. Leveraged Loan 100 Index, which tracks the most-actively traded loans, gained a record 46 percent this year after declining an unprecedented 28 percent in 2008. Goldman Sachs last week committed as much as $3.28 billion to finance the purchase of IMS Health Inc. by TPG and the CPP Investment Board.
The $5.2 billion IMS deal, announced Nov. 5, would be the largest leveraged buyout of the year. A group including KKR, based in New York, said Nov. 8 it would pay $1.65 billion for Northrop Grumman Corp.’s government consulting unit. That followed Blackstone’s announcement in October that it plans to buy Anheuser-Busch InBev NV’s theme parks business for as much as $2.7 billion.
Blackstone Deals
“Many of our managers were sitting tight during the volatile periods in the markets,” said Pacheco in an e-mail. “The market is ripe with opportunities now.”
Calpers invested $31.9 million in deals done by Stephen Schwarzman’s Blackstone in the first seven months of the year, a drop of 44 percent. Blackstone President Tony James told reporters on Nov. 6 that investors in funds of the world’s largest private-equity company are encouraging the firm to make deals.
“Limited partners once concerned about new investments are now urging us to put money to work,” James said.
Dear said he is reviewing how, and how much, his pension plan is paying private-equity firms as they start to invest again. Calpers said last month it started a special review of fees investment managers paid to placement agents to win state business.
Apollo Subpoena
Apollo has received subpoenas from authorities investigating the use of so-called “placement agents,” the Financial Times reported, citing a letter Black sent to investors. The subpoenas are from California, New Jersey, New Mexico and New York, and from the Securities and Exchange Commission in New York and Denver, the FT said, citing an unidentified person familiar with the situation.
Calpers, Ontario Teachers’ Pension Plan Board and the State of New Jersey Division of Investments have endorsed a set of “Best Practices” aimed at getting better terms when entering into partnership agreements with private-equity firms.
The guidelines, proposed by the Institutional Limited Partners Association, apply to everything from fee structure to ensuring the independence of auditors. The ILPA said management fees should “step down significantly” at the end of an investment period. The extra charges managers sometimes levy, which include transaction, exit and advisory fees, should benefit the fund, not the manager, according to ILPA.
Clawback Provisions
“The document is a starting point, meant to spark discussion between general and limited partners,” said ILPA executive director Kathy Jeramaz-Larson. “The ultimate goal, however, is limited partners getting better returns for their pensioners.”
Investors are also pushing for stronger so-called clawback provisions that would strengthen their ability to recoup money from managers who end up with more than their share of the profits.
‘Improving terms and conditions is part of our strategy as we begin the process of re-upping some managers and selecting new ones,’’ Dear said.
To contact the reporters on this story: Jonathan Keehner in New York at jkeehner@bloomberg.net; Cristina Alesci in New York at Calesci2@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net
Last Updated: November 18, 2009 00:00 EST |
