The New York Times reports:
Private equity deal-makers, those kings of corporate buyouts, made billions for themselves when times were good. But some of their biggest investors, public pension funds, are still waiting for the hefty rewards they were promised.
The nation’s 10 largest public pension funds have paid private equity firms more than $17 billion in fees since 2000, according to a new analysis conducted for The New York Times, as the funds flocked to these so-called alternative investments in hopes of reaping market-beating returns.
But few big public funds ended up collecting the 20 to 30 percent returns that private equity managers often held out to attract pension money, a review of the funds’ performance shows.
It seems, too, that private equity managers all operate out of Lake Wobegone:
The funds vary in how they report their performance and calculate their returns, allowing a significant number to classify themselves as “top quartile,” or the best performers.
We’ve been cheated here in Pennsylvania, too:
In 2009, the Pennsylvania Public School Employees’ Retirement System paid $477.5 million in fees — 20 percent more than it did in 2008 and 283 percent more than in 2000, the earliest year for which data was available.
These funds generally charge fees totaling 2 percent of the money they manage and then take 20 percent of the profits they generate.
And yet, even after paying hundreds of millions of dollars in fees, the Pennsylvania fund is ailing. It lost more than a quarter of its value during its latest fiscal year and is now worth less than it was a decade ago, although its performance has improved recently.
There is a solution, you know.
It’s called Jones v. Harris Associates, and it was decided last week:
On Tuesday the [Supreme] Court issued its opinion in No. 08-586, Jones v. Harris Associates. In a unanimous opinion by Justice Alito, the Court held that Gartenberg v. Merrill Lynch Asset Management, Inc. applied the correct standard for determining when an investment adviser has breached the fiduciary duty owed to captive mutual fund shareholders established under Section 36(b) of the Investment Company Act of 1940 (ICA). Under Gartenberg, Section 36(b) is violated when advisers’ fees are “so disproportionately large” that they “bear no reasonable relationship to the services rendered.”
Ultimately, the Court concluded, although Gartenberg “may lack sharp analytical clarity,” it has “provided a workable standard for nearly three decades.” The Court noted that the “fiduciary duty” standard established by the ICA represents a “delicate compromise,” protecting investors from fee arrangements not negotiated at arm’s length, but simultaneously shifting the burden of proof to the party claiming the breach of duty.
Why not use it? Even if pay-for-play doesn’t drive public pension shareholder lawsuits, the pensions will probably be blamed for it anyway, so give me a call and we’ll put you on a contingent fee.
Don’t worry: unlike private equity managers, we don’t get a fat paycheck when we lose.