Private Equity’s Biggest Backers Are Tired of the Fees

The biggest U.S. pension fund isn’t happy. After years of paying steep fees to private equity fund managers, it’s plotting an end run. Officials of the California Public Employees’ Retirement System, which oversees about $337 billion, gave fund managers an earful at a pension board meeting on July 17 in Monterey. Huffed one CalPERS director: “I don’t see your industry standing up and justifying fees.” (The pension’s chief investment officer later said it would explore buying more companies on its own to lower fees and lift returns.) Firing back, Sandra Horbach, a top executive at Carlyle Group LP, one of the world’s biggest leveraged buyout managers, warned that CalPERS and other pensions looking for their own deals would be at a “strategic disadvantage” in a head-to-head rivalry with private equity firms like Carlyle.

Tensions over fees, which usually flare when times are lean, are nothing new. What stands out about CalPERS’s display of pique is that it comes at a time when private equity firms and their clients are basking in profit. As managers have unloaded companies they bought earlier this decade at low prices, they’ve returned hundreds of billions of dollars in winnings to investors such as CalPERS, which put up the equity for the deals that managers stage. Investors have routed the gains back to managers, pledging $221 billion to buyout funds in the first half of 2017, according to London-based research firm Preqin Ltd. The industry would break its fundraising record set a decade ago if that pace holds.