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CalPERS CIO: Carried interest tax 'indefensible'

February 13, 2012: 1:40 PM ET

Joe Dear

Joe Dear bites the hand he feeds.

The nation's largest public pension system thinks it's time to do away with one of private equity's most cherished tax breaks.

Joe Dear, chief investment officer of the California Public Employees' Retirement System (CalPERS), said the following during an investment committee meeting earlier today: Private equity "general partners should recognize that tax treatment of their income has become indefensible."

This is a pretty major statement, given that CalPERS is one of the world's largest investors in private equity funds with around $50 billion in exposure. Its general partners include Apollo Global Management (APO), The Blackstone Group (BX), The Carlyle Group and Kohlberg Kravis Roberts & Co. (KKR).

It also puts CalPERS right in the middle of a very political debate, despite Dear's assertion that the system has "no interest in being drawn into a presidential campaign." GOP front-runner Mitt Romney is a major beneficiary of current carried interest taxation policy, while President Obama's new budget proposal would treat carried interest as ordinary income.

What I've got to wonder is if Dear has pushed this view with Apollo, Carlyle and Silver Lake Partners -- three large private equity firms in which CalPERS owns a minority ownership position (in addition to billions of dollars in fund commitments). Not suggesting that the firms voluntarily pay more taxes, but has Dear asked that they refrain from lobbying against such a change?

A few other choice quotes from Dear:

"The risk premium that can be earned from investing in private equity is a really important source of the returns we need to make sure we can meet our earnings targets. This is not theoretical."

"But we are not here as a blind defender of private equity. I think private equity is neither as good as the cheer-leading crowd would have you believe or as bad as its detractors -- on and off the political field -- claim."

"Terms and conditions offered to investors are skewed toward general partners."

"Most private equity managers I know are pretty motivated, but why they're working so hard when they have so much money is an interesting psychological case."

According to meeting documents, CalPERS only made one private equity investment during the previous reporting period: A $100 million co-investment on KKR's $7.2 billion acquisition of oil and gas company Samson Investment Co.

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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