Oregon Public Employees Retirement Fund: Push and Pull Over Gp/Lp Compensation

Abstract

The case is designed to explore the structure and rationale behind the standard compensation arrangements in the private equity (PE) industry. It effectively introduces students to commonly used terms of limited partnership agreements (LPAs), such as fees, carried interest, and preferred terms or hurdle rates. The backdrop for the Oregon Public Employees Retirement Fund (OPERF) case is the changed market conditions following the 2007 financial crisis that spurred a reevaluation of the basic terms of LPAs across the PE industry. This case has been taught in a second-year elective course on entrepreneurial finance and private equity and would be suitable for similarly focused courses on venture capital, private equity, or entrepreneurship. The case can also be used in an investment class designed to explore private equity as an asset class. Excerpt UVA-F-1628 Rev. Oct. 21, 2016 Oregon Public Employees Retirement Fund: Push and Pull Over GP/LP Compensation As rain continued to fall outside the window of his Salem, Oregon, office in December 2008, Ron Schmitz, chief investment officer of the Oregon Public Employees Retirement Fund (OPERF), contemplated his response to a recent letter from TPG Capital, L.P. (TPG). The private equity (PE) firm was offering an opportunity for investors in TPG Partners VI, L.P., a global buyout fund, to reduce their commitments by 10%. The letter also stated that all investors would receive a reduction in the management fee from 1.50% to 1.35%, and TPG promised not to call more than 30% of a limited partner's (LP's) total commitment in 2009 without advisory committee approval. TPG created TPG Partners VI to pursue a broad range of equity and equity-related investments in buyouts and restructurings. TPG originally had targeted $ 18 billion to $ 20 billion for its latest flagship fund and had been successful in achieving a first closing of the fund in February 2008 and a final closing of $ 19.8 billion in September 2008. Unfortunately, the fund had stumbled out of the gate. Earlier in 2008, the firm had invested $ 1.35 billion from several of its funds, including TPG VI, into the since-collapsed Washington Mutual. It also purchased distressed bank loans that had since plummeted in value. Opinions differed as to the motivations behind TPG's offer. Was it an attempt to “make nice” with LPs, who were struggling with major liquidity issues, and a sign that in difficult economic times general partners (GPs) and LPs were “in this together”? Compared with Permira Advisers' offer to cut back commitments by 60%, TPG's offer was small. Did that suggest TPG expected investment opportunities to be plentiful in the near future? Was it merely a public relations gesture that would allow the fund to overcome some of its recent setbacks and raise a new fund sooner rather than later? Although offers to cut back commitments were not unprecedented—the last occurring after the burst of the dot-com bubble in 2000—they generally coincided with periods of market duress. These circumstances elevated the tensions between LPs and GPs and raised questions about whether the prevailing LP arrangement that governed the industry had the appropriate incentives and rewards to align both parties' interests. . . .