On September 14, the Governor of California signed into law legislation which requires California public pension funds making investments in certain private funds, including private equity and hedge funds, to receive from the private funds and disclose to the public at least annually certain fee and other information, including:
- the fees and expenses that the public pension fund pays directly to the private fund, the fund manager, or related parties;
- the public pension fund’s pro rata share of the fees and expenses not included in 1 above that are paid from the private fund to the fund manager or related parties;
- the public pension fund’s pro rata share of any carried interest paid to the fund manager or related parties;
- the public pension fund’s pro rata share of the aggregate fees and expenses paid to the fund manager or related parties by all of the private fund’s portfolio companies; and
- the information public pension funds are required to disclose in a public records request under Section 6254.26(b) of the California Public Records Act including, among other things, identifying information about the private fund, the amount of the public pension fund’s commitments and contributions to, and distributions received from, the private fund and certain private fund performance information (such as the net internal rate of return and the investment multiple).
The law mandates that all new contracts (e.g., partnership agreements or side letters) between public pension funds and private funds entered into on or after January 1, 2017 (including existing contracts pursuant to which the public pension fund makes an additional capital commitment on or after January 1, 2017) require the new disclosures. Additionally, the law requires public pension funds to undertake reasonable efforts to obtain and disclose the same information for existing contracts with private funds.
Although the full ramifications of the new disclosure requirements on private funds remain unclear, we will continue to monitor the situation and keep our clients informed of new developments.