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State pension fund paid private equity firms $1.5b over 5 years

The Massachusetts state pension fund paid $1.5 billion to more than 100 private equity firms over the past five years — including a $1 billion share of its profits — according to data it publicly disclosed for the first time.

In exchange for the generous compensation, the pension fund reaped bigger gains from private equity than from any other investment it made: 16.2 percent annualized returns from 2011 through 2015. That added up to $4.7 billion for retirees and taxpayers.

The five-year net gains dwarfed those in stock index funds, bonds, or hedge funds.

The next-closest category was real estate, at 12.6 percent before subtracting fees, according to a year-end 2015 report by the state’s Pension Reserves Investment Management board.


Private equity — the business of buying and reselling companies — has by far been the best-performing asset class for the $62 billion pension portfolio over three, five, and 10 years.

The disclosure, made in response to a records request by the Globe, comes at a time when public pension funds and endowments around the country are under pressure to reduce the fees and profit shares, known as carried interest, they are paying on investments.

Michael Trotsky, executive director and chief investment officer of the pension fund, in a memo to the PRIM board on Tuesday about the private equity fees, said he was pleased with the results, but “we continue to work to reduce management fees paid to, and carried interest allocations retained by, our private equity managers.”

The nation’s largest public pension fund, the California Public Employees’ Retirement System, a year ago disclosed for the first time that it had paid $3.4 billion in profit-sharing to private equity firms since 1990, while logging $24.2 billion in profits.

In fiscal year 2015, Calpers, which invests 9 percent of its roughly $300 billion in assets in private equity, paid its private equity managers nearly $432 million in fees, while posting a return of 8.9 percent.


The Massachusetts fund in 2015 paid $98 million in management fees to private equity firms such as Boston’s Bain Capital and Thomas H. Lee Partners, according to PRIM. It shared $197 million in profits, after subtracting fees, while producing a net return of 14.8 percent — slightly lower than the five-year average.

Unlike Calpers, Massachusetts’ PRIM did not disclose the fees or profit-sharing paid to specific investment firms. Historically, private equity firms have demanded secrecy from investors like the state pension system, as a condition of entry to their funds.

Massachusetts law exempts the pension fund from having to respond to certain public information requests, including requests to divulge fees charged by investment managers. The pension fund compiled its total fees paid to private equity firms in response to a Globe request for records.

Private equity firms typically have charged a 2 percent annual fee on a pension fund’s money, or $2 on every $100 invested. The firms invest money in various companies over a few years, and it generally takes five to eight for returns to come to fruition. On top of that, the firms get to keep 20 percent of any profits they earn for clients, or $1 out of every $5. Firms like Bain in the past have commanded even larger sums.

But that’s changing, both due to pressure from large institutional investors and as private equity enters a cooler period following a hot decade.


The demand for lower fees and greater transparency “has been years in the making,” said Cesar Estrada, a senior managing director at State Street Corp. and head of private equity services. He said his team is increasingly responding to requests from firms and their clients for more detailed breakdowns of fees and profit-sharing. “Investors are becoming more knowledgeable,’’ he said.

Calpers in its latest report said it shared just 14 percent of its profits with its private equity managers for the year ended June 30. Massachusetts, by contrast, paid close to the standard 20 percent to about 120 firms over five years, according to its disclosure to the Globe.

PRIM in 2015 had $6.8 billion, or about 10 percent of its total assets, invested in private equity.

Trotsky said the fund is working to negotiate “preferential terms” in private equity, such as lower management fees and lower levels of profit-sharing. In addition, the fund is looking to establish a co-investment program, where it could put additional sums into deals with its private equity managers, without paying any fees on those transactions.

Hedge funds also use the so-called two-and-20 rule, with a 2 percent fee paid yearly on the assets invested and 20 percent of the profits reserved for the manager. The state pension fund said it is saving $100 million annually since launching the effort.

Beth Healy can be reached at beth.healy@globe.com. Follow her on Twitter @HealyBeth.


Correction: Due to inaccurate information provided to the Globe, an earlier version of this story overstated the state pension fund’s net five-year private equity return. Excluding fees, it was 16.2 percent. The net one-year gain was 14.8 percent.