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Home > Articles & Research > Accounting & Audit > Pension Funds Warn Against PE Fee Increase

Pension Funds Warn Against PE Fee Increase

Two of the largest public pension funds have issued a warning that they will stop investing in private equity groups’ buy-out funds should these firms seek to increase fees.

by Joseph McCafferty | January 7, 2008

Two ofthe largest public pension funds have issued a warning that they will stopinvesting in private equity groups’ buy-out funds should these firms seek toincrease fees, reports Financial Times.

Both theOregon Public Employees Retirement System and the California State Teachers’Retirement System (CalSTRS) told FT they would oppose any attempt by buy-out funds to increasethe percentage of investment profits they withhold from investors.

Thenewspaper speculates that such a stance could prompt other big pension funds tofollow suit, sparking a confrontation between the private-equity industry andits largest and most loyal investor base. “I think there would be pretty stiffresistance to that kind of a fee raise,” said Ron Schmitz, chief investmentofficer at Oregon’sstate pension fund. “I’m sure one or two buy-out funds might try that, butwe’ll walk away”.

Private-equityexecutives have floated the idea that if Washingtongoes ahead with plans to raise the tax on their profit from the current 15 percent to 35 per cent they would pass it on to their investors in the form ofhigher fees. Investors in private-equity funds typically pay a fee of 2 percentof assets under management and 20 percent of profits above a predeterminedbenchmark. The latter, known as “carried interest,” is the main source ofcompensation for private-equity executives.

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