US pension schemes warn buyout funds over tax

This is from yesterday's FT. US pension funds at least seem to recognise that they are the customer. Pity our funds in the UK seem to be in awe of the private equity industry and as such have been silent over the question of taxation.

Big public pension funds have warned they will stop investing in buy-out funds if private equity groups raise their fees to recoup higher US taxes on executives’ earnings. Senior officials from the $65bn Oregon Public Employees Retirement System and the $170bn-plus California State Teachers’ Retirement System (Calstrs), told the Financial Times they would oppose any attempt by buy-out funds to increase the percentage of investment profits they withhold from investors.

The stance by two of the biggest investors in private equity could prompt other big pension funds to follow suit, sparking a confrontation between the private equity industry and its largest and most loyal investor base. “I think there would be pretty stiff resistance to that kind of a fee raise,” said Ron Schmitz, chief investment officer at Oregon’s state pension fund. “I’m sure one or two buy-out funds might try that, but we’ll walk away”.

Private equity executives have floated the idea that if Washington goes ahead with plans to raise the tax on their profit from the current 15 per cent to 35 per cent they would pass it on to their investors in the form of higher fees. Investors in private equity funds typically pay a fee of 2 per cent of assets under management and 20 per cent of profits above a predetermined benchmark. The latter, known as “carried interest” is the main source of compensation for private equity executives and their lieutenants.

Christopher Ailiman, Calstrs’ chief investment officer, said some buy-out funds had threatened to increase “carried interest” to more than 20 per cent in order to cushion the blow of higher taxes on their income. “We have to stop and say no: the deal is still what it was regardless of the income tax situation,” Mr Ailman said.