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The Calpers debacle

Calpers' decision to publish the performance results of its individual private equity investments was a bold move, whether it realised it at the time or not. But even with today's news that it has taken them off its web site, it's not the end of the story. Far from it.

So Calpers has backed down. Its decision to remove from its web site a report detailing the performance of its private equity investments doesn't come as much of a shock to most investors. Taken in isolation, the report's contents reveal to the world what appear to be some pretty appalling performance among some of the great and the good in the private equity industry.

Sure enough, the attention the report received raised the hackles of some high-profile general partners. Soon after the report and its contents hit the headlines (it had been available for months before the media noticed it), Calpers, one of the mightiest forces in private equity investing, started taking flak from general partners. It appears that the fund was told by some firms that it would no longer be welcome as a limited partner in any new funds they raised. The US pension fund responded by removing the report.

On the face of it, it looks as though the story is one of general partners throwing their weight around to prevent valuable and scarce information being presented to people who should know how their pension fund investments are doing. ‘After all,' said one private equity fund investor, ‘if we accept that school league tables are published, why shouldn't private equity firms be subject to the same type of scrutiny?' And it's certainly true that the market should be better informed about how private equity investments are performing.

Investors are pretty much unanimous in their support for Calpers' move to make the report available. Most agree that it was a bold step and some are disappointed that other US state pension funds didn't follow the lead set by Calpers. That way, interested parties would have been able to see a broader picture rather than the snapshot that Calpers was able to provide.

But that is just the point. The Calpers report was a snapshot. It made for very interesting reading but, investors argue, it didn't provide an accurate assessment of how the funds were actually performing. For example, Hicks Muse Tate & Furst was reported to have returned Calpers a paltry five per cent so far. However, in a letter to investors, the firm claimed that Calpers had opted to invest in a later round of funding. By so doing, it missed out on two very good deals that would have pushed returns much higher.

Hicks Muse is just one example. Investors argue that, while the move to make the information available was a laudable one, the fact that it didn't explain the performance figures was rather unfair. ‘I don't think Calpers was wrong to publish the results,' said Ariane Leuftnik of Wilshire Associates. ‘However, it should have included some comments to put the performance in context.' Graham Sturrock of Bank of Scotland agreed that as a result, the figures had been ‘misinterpreted'.

There is an even greater danger, however. Now that the report is public knowledge and has received a lot of attention, many GPs may be even more reluctant than before to disclose information. ‘I liked what Calpers was doing,' said Guy Eastman, who is a director of private equity at Hermes. ‘But the danger is that people will now clam up for fear of being splashed across the headlines. If that happens, the industry will be even less transparent than it is currently.' He is more supportive of anonymous disclosure, arguing that people will be more willing to provide negative information if they are not afraid of being slated.

Yet despite all this, the controversy has brought the transparency debate even more to the fore than it was. That can only be a good thing. Hopefully, it will lead to a drive for increased disclosure rather than less.

And there is another upside for the asset class as a whole. Despite some hiccups, Calpers' overall returns are healthy by any measure. Even including the negative returns reported for the fund's latest private equity investments, Calpers has made a fraction under 20 per cent. As Sturrock says, it's a perfect example of what a diversified private equity portfolio can give investors. Maybe GPs should be welcoming it, after all.

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