Private equity firm Apollo has agreed to a deal with Calpers to reduce fees for the pension fund giant, which could translate to $125 million over the next five years, they said in a news release.
Pension funds and other investors have been able to wield increasing pressure on private equity funds to cut fees since the financial meltdown, as buyout firms have found it increasingly difficult to raise fresh cash.
The agreement is, however, not for traditional private equity investments, but for funds that Apollo manages — and may in the future manage — solely for Calpers, both institutions said in a press release.
The reduction includes a cut of around 0.2 percent in the management fee, and reduction of 1.3 percent in carried interest — the cut of profits private equity firms take — the source said.
The amount managed by Apollo for Calpers is close to $2 billion, a source familiar with the situation said, which is in addition to any money the pension fund has invested directly in Apollo’s funds. The funds managed are invested in credit-related assets, the source said. Calpers also has a stake of about 9 percent in Apollo itself, that source said.
Such separately managed accounts are individual portfolios created for large investors that do not necessarily want their money co-mingled with other investors’ assets.
Such an account gives the investor closer control of their assets and also allows them pressure to cut lucrative fees.
“It has not been that common in the private equity space, but I suspect it is an idea we will see increasingly,” said Josh Lerner, a Harvard Business School professor specializing in private equity, who noted that such funds have been more common in the hedge fund industry.
He expects large limited partners (LPs) — the pension and endowment fund investors in private equity — to increasingly demand more customized kind of services from private equity firms, such as co-investing or more strategic collaborations.
He also noted large investors had more power to demand concessions from funds.
“One of the dynamics we’re likely to see going forward increasingly is that large LPs will get increasing concessions,” he said.
Apollo and Calpers said the agreement would “further align the interests” of the two institutions and “set a new standard among pension funds and their investment advisers.”
A spokeswoman for Calpers said Apollo had offered the deal “knowing that we were very serious about wanting to realign our relationships for long term success.”
“We have had a very successful 15-year relationship with Calpers,” Apollo CEO Leon Black said in a press release.
Under the deal, Calpers is incentivised to invest more funds with Apollo to be able to gain the full benefits offered, the source said.
Apollo also agreed to give Calpers a certification every quarter that it has not used placement agents in connection with securing new capital from Calpers.
Placement agents act as middlemen between pension funds looking for places to put their money and private equity funds seeking investments. Agents typically take a percentage of the funds they raise as a fee.
Interest in these arrangements has increased as a result of a pay-to-play probe in New York that uncovered a web of connections between politically connected placement agents, investment firms and public retirement systems, notably ones in New Mexico and California.
Calpers has been under fire since disclosing last year that a placement agent firm, led by one of its former board members, had made more than $58 million in fees for representing investment firms at the fund.
As a result, Calpers has been taking a harder line on placement agents or pension-fund middlemen.