Research Insights

Original Research

The Time Has Come For Standardized Total Cost Disclosure For Private Equity

Andrea Dang, David Dupont, Mike Heale

April 2015

Given the level of detail and timing of private equity manager reports, can pension funds disclose investment costs in a consistent manner across the industry? What would full cost disclosure require of a pension fund? We found a good example of this in one of our benchmarking clients.

In 2013, the South Carolina Retirement System Investment Commission (SCRSIC) retained CEM Benchmarking Inc. (CEM)a to perform an independent review of South Carolina Retirement Systems’ (South Carolina) investment costs and performance. SCRSIC naturally assumed that the costs benchmarked by CEM would match the investment costs that are reported in South Carolina’s Comprehensive Annual Financial Report (CAFR). To their surprise, CEM could only benchmark about 50% of the investment costs reported in South Carolina’s CAFR.

South Carolina invests more assets in alternative investments, such as private equity (PE), hedge funds and real estate, than many other U.S. public funds. Their allocation to alternatives of 30% as per their 2014 CAFR [1] compared to the CEM U.S. Public universe average of 19% in 2013. Alternative asset classes, especially PE, are typically more expensive and have more complex cost structures than public asset classes. This makes cost disclosure and cost benchmarking difficult at best. For the portion of costs that CEM can now benchmark for U.S. funds, CEM’s analysis found that South Carolina’s investment costs were in line with those of other public pension funds after adjusting for fund size and asset mix.

South Carolina’s CAFR generated some negative press coverage that alleged their investment costs were unjustifiably high. However, after reviewing SCRSIC’s cost collection process, we conclude that they are simply reporting more costs than other funds rather than incurring more costs. CEM authored this paper to create momentum for improving investment cost reporting standards and disclosure, especially for private equity. Less than one‐half of the very substantial PE costs incurred by U.S. pension funds are currently being disclosed.

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