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CalPERS fee disclosure raises question of whether private equity returns are worth it


LOS ANGELES — Questions of risk and expense have been raised by the revelation that the California Public Employees' Retirement System paid private equity managers $3.4 billion in bonuses since 1990, including $700 million in performance fees for the last fiscal year, a newspaper reported.

The disclosure by CalPERS, the nation's largest public pension fund, comes as critics increasingly question the wisdom of pension funds investing in such complicated corporate deals as startups and leveraged buyouts, according to the Los Angeles Times (

CalPERS officials emphasized that private equity generated $24.2 billion in net profit for the state's retirees over the 25-year period — a strong performance that they said more than makes up for the sector's added risk, complexity and cost.

Like many public pension funds, CalPERS has relied on the potentially large returns on private equity investments to help finance benefits for its 1.7 million current and future retirees — and to avoid turning to taxpayers to make up shortfalls.

"Returns from those sorts of investments need to be much higher than returns on assets not bearing similar risks and especially to justify such huge fees," said David Crane, a Stanford University lecturer in public policy. "From what I read today about CalPERS' returns on private equity, it's hard to see that being the case."

CalPERS' disclosure, although not the first of its kind, is considered a landmark because of the system's size and influence in the market, the newspaper said. It's expected to lead major pension funds to demand similar, or even more, disclosures from a multitrillion-dollar industry that has been insulated from calls for reform by the relatively rich returns it generates.

The California State Teachers' Retirement System, for instance, plans to take up the issue of private equity disclosure at the system's board meeting in February.

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