The $56.7 billion Pennsylvania Public School Employees’ Retirement System (PennPSERS) has revealed it paid its private equity general partners 19.41 per cent of investment profits as carry between the program’s inception in 1985 and 2017. The revelation, which came after a laborious process involving 500 staff hours, comes as the fund ends its longstanding practice of reporting only the base management fees it pays GPs and begins also disclosing the split of the investment profits – or the so-called carried interest.
In our report, General Partner Ownership Interest, we look at our record so far and define carried interest and other fees the fund pays.
PennPSERS is one of the most transparent pension funds in the US regarding disclosure of management fees. For example, certain pension funds report little to nothing in management fees for alternative investments because they are considered part of the cost of the investment and are netted against performance rather than shown separately. In contrast, PennPSERS gathers management fee information from each of its limited partnerships and collective trust fund investments, even if it is not specifically disclosed in the fund’s standard reports or specifically identified in capital call requests.
Such management fee information includes both base and performance fees obtained from the fund’s administrator statement, capital account statement or financial statements. This data is then used to report all relevant management fees in the fund’s financial statements.
While the debate in the US over what constitutes a fee continues, PennPSERS will endeavour to remain transparent and report fees in accordance with current Government Accounting Standards Board (GASB) guidelines and prevailing public pension industry practice, to keep PennPSERS’ financial statements both meaningful and easier to compare with its peers. In addition, PennPSERS reports all other investment expenses, including staff compensation and overhead, plus consultant, legal and bank costs.
Additionally, at the October board meeting, the fund created an ad hoc agency committee on fee transparency. It is made up of five board members and appropriate staff. They will be looking into ways to further improve fee transparency, including how to collect and report carried interest.

Carried interest
Carried interest is the amount a GP retains as an ownership or capital interest in the investment profits of a partnership. Generally, GPs retain 20 per cent of the investment profits in a limited liability partnership, while the limited partners receive the other 80 per cent. Carried interest is earned by the GP only after the limited partners receive 100 per cent of the capital they have contributed to the partnership – including the cost of investments, fees and partnership expenses –plus a preferred return, usually 8 per cent, on the contributed capital. This GP ownership interest may be based on each individual investment as it is realised or the partnership as a whole.
There are two views on the definition of carried interest. Either a GP’s profit share on the sale of a capital asset (capital gain) or a performance fee for the manager. No consensus exists.
Under the GASB, pension plans are not required to include in the reported amount of investment expense those investment-related costs that are not readily separable from investment income (where the income is reported net of related expenses). Common practice is not to disclose certain investment-related costs and offsets. One reason for this is that financial statements become less comparable with other plans. It is also costlier to break these fees out than just to report a net number.
The new transparency has no impact on the total investment income net of fee earnings but listing carry and operating expenses will show that a better performance incurs higher investment expenses and that could cause public confusion around this model.

Michael Benson is senior investment professional, James Grossman is chief investment officer and Evelyn Williams is press spokeswoman at PennPSERS.

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