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Kentucky high school history teacher Randy Wieck is on a lonely mission to discover the whereabouts of the 12 percent of each paycheck he and 74,800 other educators are putting into a state pension fund. He’s especially keen to unearth details on the $1.1 billion the badly underfunded Kentucky Teachers’ Retirement System has committed to private equity and hedge funds. The quest pits Wieck against billionaire fund managers, a white-shoe law firm, state pension officials, and even his own union. “It’s my money and taxpayer dollars they’re skimming,” he says. “And they refuse to say how much they’re charging.”

Wieck filed an open-records request last fall seeking access to details of the terms under which his pension plan had invested in alternative assets. Frustrated by the resistance he faced, he drafted his own legal complaint and sued the plan in Jefferson County Circuit Court in November. The suit was dismissed on jurisdictional grounds in March. Wieck is considering whether to refile in Franklin County, where the judge said the suit belongs.

The teacher’s contention that alternative-asset managers may be tacking on hidden charges and otherwise harming investors is supported by research from the U.S. Securities and Exchange Commission. More than half of private-equity firms surveyed by the SEC were found to be adding “hidden fees” on top of those disclosed to clients, Bloomberg reported last April. Given the broad concerns the SEC raised, Blackstone Group and TPG Capital have begun detailing in marketing materials tens of millions of dollars they charge portfolio companies for services such as health-care consulting and bulk purchasing.

Private equity firms pool money from investors to buy companies with the goal of restructuring and reselling them at a profit. Pension funds have invested more than $3 trillion in private equity and other alternative assets. It’s expensive: Pension funds and other investors typically pay private equity firms 2 percent in annual fees, plus 20 percent of profits on any investments.

Private equity officials say that to run their businesses, they have to keep virtually everything about their operations secret, including their fees. They often require the public pensions investing in their funds to sign confidentiality agreements and join them in resisting Freedom of Information Act requests, open-records requests, and legal actions by pension participants, taxpayers, or anyone else seeking details about the agreements. Dory Wiley, chief executive officer of Commerce Street Holdings, defends the need for secrecy. His funds have what he calls a unique strategy for buying distressed bonds that he doesn’t want others to imitate. “You can’t copyright an idea,” he says. “And there are a lot of firms on Wall Street that copy what others are doing.”

Wieck—a Louisville native with a Ph.D. in American studies from the Sorbonne—believes he and his colleagues have reason to worry. Theirs is one of the worst-funded teachers’ plans in the nation, at $18.7 billion in assets, with just 54¢ on hand to pay each dollar of promised benefits.

After Wieck sued, Carlyle Group and Blackstone separately hired Joseph McLaughlin of Simpson Thacher & Bartlett, who drafted almost identical letters arguing that releasing the documents “would cause substantial competitive harm.” Sharing an edited version was also impractical because “confidential trade secret information pervades the requested documents.” McLaughlin declined to comment.

On examination, such documents show that the industry often labels as "trade secrets" information that has as much to do with high fees, weak oversight, and conflicts of interest as it does with business strategies. Bloomberg obtained roughly 50 private equity fund documents similar to those Wieck is seeking. The excerpts below from Blackstone Group, Camelot Group, Commerce Street Capital, HKW, and Starwood Capital reveal how private equity firms shore up their power—often at the expense of pension funds and the people who depend on them. All the companies declined comment, except Commerce Street.

1. Fund managers decide how much their assets are worth

Legalese: “Asset valuations will be determined by managers. The fund does not intend to commission periodic appraisals of the investments and will not be obligated to provide fair market value estimates.”

What that means: Private equity managers often have large holdings in illiquid assets such as troubled companies and real estate, which are, in fact, difficult to value. That said, it's in the managers' best interests to assign generous values because the managers typically get to keep 20 percent of profits and rely on historical returns to pitch new funds to investors.

2. Managers decide what to pay themselves

Legalese: “Managers expect that affiliate services will be provided at competitive rates but the compensation may not be determined through arm's-length negotiation.”

What that means: Private equity funds often buy troubled companies and try to restructure them. In the process, they hire affiliates in which the private equity partners may have financial interests to provide administrative and other services. The SEC has found that such related-party dealings often come at a steep cost that cuts into the returns paid to pensions and other fund investors.

3. The chief compliance officer freelances at your expense

Legalese: "A law firm wholly owned by HKW's partner, General Counsel and Chief Compliance Officer, also has an arrangement with five of the HKW funds to act as counsel when such HKW Funds purchase or sell portfolio companies. ... There may be a conflict between her economic interest and what is in the best interests of those HKW funds."

What that means: The chief compliance officer is responsible for making sure that a private equity firm acts in accordance with applicable laws and fund terms. The language above, though, notes that she may also act as counsel to related funds at the same time. That opens the door to conflicts of interest, which should be a red flag for investors.

4. Yes we self-deal. But you must still trust us

Legalese: “Fund managers can invest in companies in which they have a preexisting interest. They may invest in other funds which may compete with the fund for investments, management's time and in other ways. ... It may be difficult for investors to subject the behavior of fund managers to close scrutiny. Investors will ultimately be heavily dependent upon the good faith of the fund managers.”

What that means: Private equity managers often run several funds and may use them to buy and sell assets in which they already have a stake. Investors often have no way of knowing what's going on. They just have to trust that the fund managers are doing the right things.

5. It’s industry practice for some investors to profit at the expense of others

Legalese: “In accordance with common industry practice, managers may enter into ‘side letters’ that grant certain investors rights, benefits and privileges not made available to other investors. Such agreements will be disclosed only to investors who have negotiated rights to review such agreements.”

What that means: Big investors in private equity funds often receive especially favorable terms such as fee cuts and first looks at especially attractive investments. Such arrangements, which are outlined in "side letters," are often kept secret from the other investors, who may be at a disadvantage as a result.

6. Rules? Not for us

Legalese: "The fund is not subject to the Investment Company Act, which, among other things, requires investment companies to have independent directors and to maintain their assets and securities in the custody of a qualified custodian … "

What that means: Mutual funds are strictly regulated under federal securities law. Private equity and hedge funds are not.

7. Public officials must fight for our secrecy

Legalese: "If a public records access law requires a limited partner to disclose information … the limited partner must take all reasonable steps requested by Blackstone to oppose and prevent disclosure.”

What that means: Private equity firms argue that virtually everything about their activities is a "trade secret," and pensions and other investors in their funds agree in advance to keep it that way.



Clarification: The SEC's research into hidden fees cited in the third paragraph surveyed only private-equity firms.

(Corrects nature of the SEC survey cited in the third paragraph. The agency surveyed only private-equity firms about fees.)