Kentucky Retirement Systems to Provide More Detail on ‘Alternative’ Investments

Tommy Elliot, chairman of the Board of Trustees, and Executive Director Bill Thielen listen to a presentation during the meeting of Kentucky Retirement Systems on May 15, 2014.

Alix Mattingly/KyCIR

Tommy Elliot, chairman of the Board of Trustees, and Executive Director Bill Thielen listen to a presentation during the meeting of Kentucky Retirement Systems on May 15, 2014.

Kentucky Retirement Systems, which runs the $16 billion pension and health care funds for state, city and county workers and retirees, will be providing more detail about the fees it pays to the managers of its so-called “alternative” investments.

Interim investment director David Peden said today that the move was approved by the KRS Board of Trustees at its meeting Thursday. He said KRS’ investment committee and the full board warmed to the idea after articles by the Kentucky Center for Investigative Reporting and the Lexington Herald-Leader on the level of transparency about fees paid to hedge funds and private equity firms.

Until now, KRS had disclosed the total amount of fees paid to investment firms — $53.6 million in the year that ended June 30, 2013 — but did not report the fee rates charged by individual firms. That practice will change in coming weeks, Peden said, as KRS staff posts fees for all current holdings on the agency’s website. 

Alternative investments, such as real estate, mining ventures and limited partnerships, account for about 30 percent of the KRS portfolio. Pension funds have shifted more money into alternatives in the past decade to reach investment objectives in the face of volatile stock markets and the low-yielding bond market.

But the lack of disclosure about fees and specific holdings have kept public pension system stakeholders in the dark about where their money was going. Although KRS will disclose the fee rates charged by investment firms, it still won’t provide actual dollar amounts paid. Further, it will not disclose the fee rates assessed by the underlying hedge funds in so-called “fund of funds” investments that represent 10 percent of KRS assets.

What exactly is in these alternative funds, such as the $521 million “Henry Clay Fund” and the $500 million “Daniel Boone Fund,” will remain a secret by virtue of confidentiality agreements between KRS and those fund managers. But Peden was willing to provide some details about $325 million in new alternative investments approved by the board Thursday.

– A $100 million investment in the Deutsche Bank Secondary Opportunities Fund III will go toward limited partnership.

– A $65 million investment in Taurus Mining Finance Fund will go toward precious and industrial metal mining ventures globally.

– A $60 million investment in Crestview Partners III will go toward leveraged buyouts.

– A $50 million investment in BTG Pactual Timberland Fund I will go toward timberland.

– A $50 million investment in Oberland Capital Healthcare will go toward prescription drug royalties.

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