Private equity firms offer presumably higher earnings than typical stocks but also charge management fees and take a cut of investment profits, typically without publicly disclosing those amounts.
CalPERS is one of the world's largest private equity investors, with $27.5 billion committed. The agency reports earnings $4 billion from those funds last year, while private equity firms received $700 million from profit-sharing and more than $400 million from management fees. CalPERS defends those fees as worth it.
"Private equity has the highest net returns in our portfolio," CalPERS Chief Investment Officer Ted Eliopoulos said in a statement. "As a long-term investor, it is an important piece of our investment strategy and our mission to provide pension benefits for generations to come."
Joshua Rauh, a professor of finance at Stanford University and a fellow at the Hoover Institution, questions the strategy.
"In total, the private equity firms seem to be able to do something that makes money," Rauh says. "But it’s not clear that CalPERS is capturing much more of that value than they would get if they just invested in simpler, cheaper, more liquid investments."
Rauh says private equity did beat CalPERS's other stocks, but only marginally surpassed other public funds CalPERS could invest in.
CalPERS says it compiled and released the often undisclosed information about payments in an effort at greater transparency.