US/UK - A decision by the California Public Employees' Retirement System (CalPERS) to adopt a performance disclosure policy for its private equity investments could prove "highly misleading", according to one expert.
CalPERS, the world’s largest pension fund, announced the move earlier this week adding that it hopes to offer a blueprint for the rest of the industry.
But managing director of London-based private equity specialist Sovereign Capital, Peter Brooks, believes that the level of disclosure levelled by CalPERS could prove misleading because its does not present the full picture.
The US$131bn CalPERS fund will publish figures on a quarterly basis, including internal rate of returns (IRRs) for its funds and fund of funds, amounts of cash invested and profits.
We intend to provide the highest level of transparency that will not conflict with our fiduciary duty to our members – to maximise investment returns, said Sean Harrigan, president of CalPERS’ administration board.
CalPERS decided to withhold the identities and performance of individual companies within funds because it could “cause economic harm to Calpers, the companies and the fund managers.
Private company information typically includes sensitive data such as proprietary technologies, patent secrets, competitive strategies, financing alternatives, company valuations, cash positions, management changes, and buyout targets.
Mark Anson, chief investment officer, said: There is a consensus in the industry that providing transparency of individual fund performance would not be detrimental to investment results, but there will be material negative impact if we disclosed portfolio company data.
But Brooks disagreed: “Generally publication and use of comparative statistics, liquidity and maturity of the fund can be highly misleading.
“For example it does not incorporate a balanced view given the investment strategy of the VC fund. It may not take into consideration currency fluctuations, different funds may use different valuation techniques and in addition different methods of IRR calculations.
“There is a real threat of misguided confusion on picking raw IRR data for any fund at any one particular point in time without knowing the underlying detail.”
Brooks believes that disclosure is only helpful in certain circumstances, including the comparison of performance of fully mature funds, net cash in and out.
“And then it is only helpful if you know the return/reward profile of the funds the pension fund invests in.”
It is unclear as to whether CalPERS is measuring all of its investments on an equal comparative basis, across stages, size, region and sector. Calls were not returned during press time.
“What rate of return would you expect from a pan-European mid-market buyout fund versus a US biotech start-up fund and over what period of time would you expect your money to mature?”, asked Brooks.
“The diversity in private equity returns has to be seen in context against the ever changing returns on public investments, government bonds,hedge funds and cash.
“Private equity figures in isolation are misleading and it does take careful interpretation to be able to give a balanced view.”
CalPERS will release its private equity performance data on its web site by April 30.
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