On September 14, 2016, Governor Jerry Brown approved an amendment to the California Government Code, effective January 1, 2017, that requires a "public investment fund," defined to mean "any fund of any public pension or retirement system, including that of the University of California," to make certain disclosures at least annually concerning investments in each "alternative investment" vehicle in which it invests. An "alternative investment vehicle" is defined to mean "the limited partnership, limited liability company, or similar legal structure through which a public investment fund invests in an alternative investment." An "alternative investment," in turn, means an investment in a private equity fund, venture fund, hedge fund, or absolute return fund."
Such disclosures include: (i) the fees and expenses that the public investment fund pays directly to the alternative investment vehicle, the fund manager or related parties; (ii) the public investment fund's pro rata share of fees and expenses not included in (i) that are paid by the alternative investment vehicle; (iii) the public investment fund's pro rata share of carried interest distributed to the fund manager or related parties; and (iv) the public investment fund's pro rata share of aggregate fees and expenses paid by all of the portfolio companies held within the alternative investment vehicle to the fund manager or related parties.
These disclosure requirements are in alignment with: (i) enforcement actions brought by the Securities and Exchange Commission over the past several years against private fund managers for failure to adequately disclose conflicts of interest and the fees and expenses borne by investors in their funds; (ii) similar legislative initiatives in other states; and (iii) the publication by the Institutional Limited Partners Association of a proposed reporting template that captures greater detail on fees, expenses and carried interest paid to private fund managers and their affiliates.
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