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CalPERS eyes further fee breaks

The pension’s CIO Joseph Dear said LPs that can 'stick together' in the face of GP opposition will be able to win more LP-friendly terms.

The California Public Employees Retirement System will ask private equity firms with which it has “significant relationships” to lower fees, the pension’s chief investment officer Joseph Dear said at a conference in California Monday.

Already, the pension has convinced Apollo Global Management to cut $125 million over five years out of fees it charges CalPERS in its separately management accounts, a move the pension hopes to repeat with other private equity managers.

“[Apollo’s fee reduction] is a significant step forward, and we intend to take that to our other significant private equity relationships,” Dear said at the Milken Institute Global Conference.

“If you look at the cost of operating a pension fund, the overwhelming majority of our expenses are investment management fees paid to private equity, hedge funds and real estate,” he said. “And with the collapse in asset values, the cost of managing our fund went way up.”

The shift to more LP-friendly fees, in which “the LPs and GPs make money at the same time” will take time, and will get done “fund by fund”, Dear said.

“It’s the classic prisoner’s dilemma. Each of us knows individually we’re better off if we get terms and conditions but it’s possible for a highly qualified general partner to pick people off and say, ‘these are really the terms, take it or leave it’,” Dear said. “If [limited partners] stick together, you can overcome that, but if people defect then that bargaining leverage goes away.”

There has never been a better time for LPs to press their case, he said. “If we don’t take advantage of it, then it’s a big missed opportunity, so we’re determined to make the most of it,” Dear said.

His comments were part of a broader panel featuring institutional investors. Click here for additional PEO coverage.