Fee transparency debate takes hold in Netherlands

In a statement published in early August, PGGM chief investment officer Ruulke Bagijn outlined a set of prerequisites to be met by asset managers hoping to receive commitments from the pension fund. First, pay and remuneration schemes need to be transparent. Performance fees should also not be charged until fund performance reaches the agreed threshold. Finally, the management bill paid to GPs should be kept at a basic level. "There is growing pressure from our clients [...] on behalf of whom we invest to no longer be silent on the size of pay," the document states.

PGGM's announcement highlights the escalating controversy around private equity fees. In January, it was revealed that KKR had reimbursed fees to a number of its LPs after the US Securities and Exchange Commission (SEC) discovered that some of them, including pension funds, had been "wrongly charged" and "not properly notified" of certain expenses.

The debate gathered momentum in the US when Calpers admitted it could not track the fees it paid to private equity houses. Far from isolated, the incident illustrates a broader opacity theme voiced by the SEC itself. In May 2014, the regulator announced that more than half of the private equity firms inspected by its examiners worldwide were guilty of wrongly charging investors with "back-door" fees and insufficient transparency.

Taking the lead
PGGM's decision to put its foot down follows a turbulent few months for private equity houses in the Netherlands. A series of high-profile stories around debt-ridden portfolio companies has put several houses under the spotlight. Furthermore, politicians have targeted the industry with a set of "anti-easy-money" proposals as they questioned several GPs during a roundtable event in April. With pressure now coming from the country's second largest pension fund, this latest development could potentially spark a chain reaction as other LPs follow its lead and delve deeper into fee charges.

Indeed, PGGM has been vocal about gaining support from other LPs as it seeks to improve fee transparency. "We will search for cooperation with like-minded people in the pensions world to act collectively against unacceptable practices," Bagijn announced, adding that efforts will be made to internalise investment management operations to drive down costs. The strategy mirrors PGGM's plans, revealed by a spokesman to unquote" in July, to increase its co-investment activity in the coming months. The pension fund has already made one co-investment alongside TDR Capital in the €3.7bn buyout for Dutch fleet manager LeasePlan.

According to the Dutch Private Equity and Venture Capital Association (NVP), despite PGGM's decision to increase its co-investment activity, the industry should not worry that all LPs will go the same way. "We do see some investors setting up their own private equity arms or opting for co-investments," says Marc van Voorst, public affairs manager at NVP. "But their need to diversify to higher yielding asset classes is enormous and our sector consistently delivers good returns. It is still a mutual benefit to both sides to continue working closely together."

When asked his take on PGGM's accusations of opacity in private equity, van Voorst highlights the progress the industry has already made in this area: "Enormous steps have been made so that Dutch pensions have plenty of information on cost fees, which is why they are referred to as the most transparent in the world."

Whether or not these steps to improve fee transparency placate LPs, their move to ramp up co-investments and direct investments can be seen as a positive; it could be a wake-up call for GPs to stay on top of their game. "The entrance of new players can only be a challenge to remain the best in the market. Something like this keeps everyone focused," says van Voorst.

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