WRS News Online

SWIB Keeps Close Eye on Private Equity

Private Equity ImageInvestment Returns, Contributions, Shared Risk Keep System Healthy

One of the reasons the Wisconsin Retirement System is among the few fully-funded public pension plans in the country is the respectable returns generated by the State of Wisconsin Investment Board. Those returns, along with contributions from employees and employers and the unique shared risk and reward design of the WRS make it a model system.

An area that may not immediately come to mind when thinking about why the WRS is fully funded, but is equally as important, is cost management. Every dollar SWIB can save in cost for managing the assets of the WRS is just as good as a dollar earned through investment returns.

Managing more WRS funds in-house is the best way for SWIB to control costs. However, there are times when SWIB uses outside managers for certain investments.

“One of the reasons we are considered a low-cost pension fund manager is because we are able to internally manage almost 60% of the investments we are making,” SWIB Executive Director Michael Williamson said. “But, we are also a low-cost manager because when it is necessary to use outside managers, we negotiate lower fees when compared to our peers and scrutinize the agreements we make with those managers to know exactly what we are paying for and how much we are paying.”

The issue of fees and expenses charged by external managers has gained national attention recently because of accusations that some private equity managers are not being transparent in the information they are providing to investors.

Private equity investments are made in companies that are not publicly traded on the stock markets. SWIB, like many public pension funds, makes private equity investments through a general partner or external manager and pays fees for those services.

The lack of transparency by some private equity managers prompted the Securities and Exchange Commission to investigate the fee and expense reporting practices of those firms.

SWIB, with the help of a consultant, has reviewed private equity general partners it works with and has found no fee or expense abuse.

“Since the SEC’s investigation, we have actually seen an increased level of transparency with respect to fees and expenses,” Scott Parrish, SWIB Private Markets Group portfolio manager, said.

In addition to monitoring the external managers it works with, SWIB has teamed with other organizations, such as the Institutional Limited Partners Association, which has more than 300 members and includes pension funds, sovereign wealth funds, endowments and foundations, to support standardized reporting in the industry. As an organization, SWIB works to identify best practices related to private equity accounting and reporting.

Parrish says how private equity fees and expenses are reported is an area that will remain under scrutiny since the investments, in addition to being an important part of SWIB’s diversification strategy for the Core Fund, have added value to the WRS returning 15.5% in 2014 and 14.6% over the last 10 years.

“We have and will continue to monitor this to make sure firms we are working with are transparent in the information they are providing us,” Parrish said. “Knowing the true cost of the private equity investments is important information that will help us make better informed decisions in the future.”