TEACHERS RETIREMENT BOARD. INVESTMENT COMMITTEE Item Number: 19 CONSENT: ATTACHMENT(S): 0. DATE OF MEETING: November 16, 2016 / 20 mins

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1 TEACHERS RETIREMENT BOARD INVESTMENT COMMITTEE Item Number: 19 SUBJECT: Annual Investment Cost Report CONSENT: ATTACHMENT(S): 0 ACTION: DATE OF MEETING: / 20 mins INFORMATION: X PRESENTER(S): Debra M. Smith, April Wilcox, Shifat Hasan, Raelan Lambert, Pavilion Alternatives Group, LLC POLICY Investment cost reporting and monitoring requirements are governed by the CalSTRS Investment Policy and Management Plan (IPMP), Teachers Retirement Board Policy Manual, Section 1000, page A-1. As the controlling policy document for the Investment Branch, the IPMP establishes the framework for meeting CalSTRS objectives. The third objective after return and risk for the investment portfolio is to minimize the cost of investments. The Investment Branch takes this objective very seriously and strives to operate the plan in the most effective lowest cost manner. HISTORY AND BACKGROUND OF THE ITEM Investment cost reporting has been presented to the Investment Committee every year since At the November 2015 meeting, staff developed new investment cost reports to provide the Committee visibility into internal and external investment management costs across asset classes and investment strategies (direct costs). Additionally, staff indicated that capitalized or netted costs were not included in the reports. During this discussion, the Committee requested staff to develop a proposed project plan to track all expenses and fees including those that are capitalized or netted (indirect costs) from the investment before CalSTRS receives a return. At the February 2016 meeting and in response to the Investment Committee s request, staff developed a project plan to track indirect costs that were previously not included in the November 2015 annual cost report. The project plan included outsourcing the majority of the work to an existing CalSTRS investment project consultant. Staff also proposed that in the long term, the Investment Branch will research an infrastructure to track all costs using internal resources. A motion was passed to confirm and implement the project plan as recommended by staff and to add the project to the Committee s work-plan. Earlier this year, the Investment Branch engaged LP Capital Advisors, LLC, which was rebranded as Pavilion Alternatives Group, LLC ( Pavilion ) to contact CalSTRS general partners and real estate managers to obtain paid management fees, partnership expenses, other fees and expenses, and carried interest associated with CalSTRS capital investment for calendar year INV248

2 Page 2 PURPOSE The purpose of these informational reports is threefold: (1) To provide the Committee our standard annual cost report; now enhanced with a comprehensive view into direct and indirect costs associated with the various investments across our asset classes; (2) To provide the Committee the results of the investment cost project completed by the project consultant to capture and track carried interest and all types of indirect costs such as general partner revenues and limited partner expenses (for calendar year 2015) attributable to the investment of CalSTRS capital; (3) To provide the Committee peer comparisons of investment cost data prepared by two external cost measurement providers. Their analyses compare our results to peers and make a determination regarding our cost effectiveness over their reporting period. DISCUSSION Investment costs are an important determinant of fund performance; they are a drag on investment results and require close oversight and active monitoring. CalSTRS investment staff understands that our members depend on their retirement from our NET results and not our gross returns. As such, costs are consistently monitored and factored into staff s decision making process. In addition to investment cost monitoring and reporting, we utilize benchmarks to measure the relative performance of the investment portfolio in relation to our costs. CalSTRS investment staff engage in rigorous negotiations and work diligently to reduce investment costs across all assets. After the financial crisis in 2008, the investment staff started an aggressive fee reduction plan with all our existing investment managers, enabling us to achieve on average a 15% cutback. This continues to be an ongoing initiative for the Investment Branch. We are keenly aware of the important role investment costs play in meeting our risk/return objectives and the need to push costs even lower. There are over 600 partnership investments, separately managed accounts, joint ventures and coinvestments within CalSTRS complex global investment portfolio. The majority of capitalized and netted costs are from partnership structures, primarily within Private Equity, Real Estate, Inflation Sensitive, Innovation Program, and Corporate Governance. The individual limited partner s (i.e. CalSTRS) expenses are not separately recorded nor provided in a consistent format that allows for simple extraction, comparison and aggregation across asset classes and strategies. While each partnership has an audited annual financial statement, which is closely reviewed by staff, the netted costs and expenses are not uniformly disclosed nor are they delineated by each respective limited partner. As a result, the information must be carefully obtained one investment at a time through direct engagement. For the private assets, Pavilion was contracted to capture 2015 calendar year costs (on a cash basis) associated with managing these assets, including fees and expenses that are capitalized and netted. These fees and expenses are typically netted from CalSTRS investment values and are included in the net performance as reported by our custodian. Additionally, Pavilion was asked to capture and track carried interest (profits shared) along with management fees, partnership expenses and other fees (primarily consisting of portfolio company fees) paid to the general INV249

3 Page 3 partner, manager and its affiliates per the limited partnership agreements. To obtain the cost information of our private assets, the project consultant utilized a modified version of the reporting template ( Fee Template ) developed by the Institutional Limited Partners Association ( ILPA ) for private equity. Data was obtained through a combination of the Fee Template and other sources, which included financial statements and supplemental schedules provided by the general partners and managers. Within the public asset classes, fees/costs such as broker commissions were obtained from our global master custodian and soft dollars were retrieved by staff and included in the report. While staff indicated at the February 2016 meeting that we anticipated reporting the trading spread for certain Fixed Income and currency instruments, there is an extensive effort required to capture these spreads and the uniqueness of each transaction results in the inability to produce an estimation with a high degree of confidence; therefore they are not included in these reports. As mentioned in November 2015, for our Securities Lending Program, we pay lending agent fees one of two ways: directly to the lending agent or by netting the fee against our contractual share of the income. These expenses are not outlined in these reports; however, they are included in CalSTRS comprehensive annual financial report. The Securities Lending Program, managed by Fixed Income, is a low-risk strategy that allows CalSTRS to use its existing asset base and lending expertise to generate additional income. There is no industry standard for investment cost reporting. The Investment Branch continues to improve and enhance its cost reporting to provide more transparent information across all asset classes, comply with regulations and follow best practices. The section below provides a synopsis of how we view investment costs for annual reporting purposes. Reporting Methodology As previously mentioned, due to their characteristics such as non-standard reporting format and variability in deal structures, private asset reporting is exceptionally complex; therefore, performance measurement and cost extraction is intricate and not directly comparable to our peers. Staff is committed to enhancing private asset cost disclosures and to setting investment cost reporting standards using the following methodology: CalSTRS Gross Return = Total Return (Indirect Costs + Public Market Transaction costs) CalSTRS Net Return = Gross Return Public Market External Management fees Within this report, we have presented two independent views of our cost information: 1) External Management Costs vs. Internal Management Costs (Chart 1) 2) Direct Costs vs. Indirect Costs (Chart 2) External management costs are expenses that are associated with external asset management. Generally, these are management fees of private and public market investments, partnership expenses and internal support and oversight of the externally managed portfolios. Internal management costs are expenses that are incurred for internal asset management and include associated operational and administration costs for the management of those investments. Direct costs, generally, are the expenses that we initiate a payment for and pay via the State Centralized Treasury System. Examples are management fees for public market investments, INV250

4 Page 4 internal staff salaries and operating costs. We define indirect costs as the expenses associated with private assets including the costs that have been capitalized and deducted from the value of the investment such as management fees for limited partnerships. Carried interest is a profit sharing payment made to certain investment managers after certain investment goals and thresholds have been achieved. It is deducted from the investment before CalSTRS receives its return and therefore is deducted before calculating CalSTRS investment performance. Carried interest is positively correlated to investment returns as it is paid when an investment is profitable and typically meets a certain performance hurdle rate. Additionally, carried interest is most frequently not paid until all previously paid management fees are returned to the limited partners (i.e. CalSTRS). We report carried interest separate from the costs mentioned above (for detailed definitions, please see Appendix A - Glossary). The following attachments provide investment cost information across asset classes and investment strategies for calendar year 2015: Attachment A Investment Cost Report Outline This report outlines the investment costs which are included in this report in comparison to previous years reports. Attachment B Comprehensive Internal/External Cost Report by Asset Class/Investment Strategy This report provides a view into the investment portfolio s internal and external management costs by asset class and investment strategy. It breaks out costs by their major categories and asset allocation information. Attachment C - Comprehensive Internal/External Cost Report by Private and Public Investments This report provides a view into the investment portfolio s internal and external management costs by public and private market investments. Attachment D Direct Cost Report by Asset Class/Investment Strategy This report presents the direct investment costs by asset class and investment strategy. It breaks out costs by their major categories and also provides actual asset allocation information. Attachment E Indirect Costs & Carried Interest Report This report was prepared by Pavilion and discusses the private market indirect costs and carried interest across Private Equity, Real Estate, Inflation Sensitive, Corporate Governance, and Innovation Program. Attachment F Peer Comparison This report provides an overview of how CalSTRS investment costs compare to its peers. Data on this report is based on a third party cost measurement service provider. Appendix A Glossary Contains definition of key terms as they pertain to these reports and our reporting methodology. INV251

5 Page 5 Summary of Cost Reports This section provides a holistic view of our investment costs and carried interest. As mentioned previously, total costs are for calendar year 2015 and on a cash basis. TABLE 1 OVERALL COSTS (as of December 31, 2015 in 000s) NAV Cost Bps Total Portfolio 186,099, , Total Portfolio w/carried Interest 186,099,586 1,585, Total investment costs were 51.8 basis points (bps) in 2015 compared to an estimate of 30.8 bps in the year The large upward shift is primarily due to the fact that the 2015 indirect costs obtained by the project consultant, include approximately $320 million in netted partnership expenses and other fees that were previously not delineated nor included in the 2014 cost report. Charts 1 and 2 contain some of the key cost information and should be read independent of each other and in conjunction with the attachments. Chart 1 illustrates our view of how the overall costs are broken by external management costs, internal management costs and carried interest. CHART 1 CalSTRS Investment Portfolio - External & Internal Management Costs and Carried Interest Carried Interest 39% External & Internal 61% External Mgmt. Costs 97% Internal Mgmt. Costs 3% External asset management cost approximately $935 million in 2015, of which $139 million was attributable to the management of the public market investments and the remaining $796 million attributable to the management of private investments (see Attachment C). Private assets are complex and require a higher degree of expertise, resulting in higher costs. At the February 2016 meeting, Meketa Investment Group presented a Public Market Equivalent (PME) analysis that assessed the performance of our private equity program compared to public equity alternatives. The analysis disclosed that the private equity program added significant value to CalSTRS, relative to having invested the same capital in public markets. It demonstrated INV252

6 Page 6 that so far, the higher costs of these types of investments are offset by the greater risk/return benefit they provide. Costs for internal asset management were $28 million in 2015 compared to $23 million in The increase was due to implementation of initiatives to move more investments to internal management. Internal management of investments is generally more economical than external management and provides access to timely cash flows. Internally managed investments represent 39% percent of the total portfolio (see Attachment C); however they represent only 3% percent of the total costs (see Chart 1). For asset class level detail on external and internal management costs, please refer to Attachments B and C. Chart 2 depicts our second view of costs and displays how the costs are broken out by direct costs, indirect costs and carried interest. This view is independent of the external and internal management costs as discussed previously. CHART 2 CalSTRS Investment Portfolio - Direct & Indirect Costs and Carried Interest Direct & Indirect Carried Interest 61% 39% Direct Cost 22% Indirect Cost 78% Direct costs totaling approximately $216 million reflect management fees for public markets, internal salaries and operational and administration costs (see Attachment D). Indirect costs of approximately $747 million that consist of the expenses associated with private assets contain management fees, partnership expenses and other fees and expenses (see Attachment E). As mentioned before, there is no standard practice across our industry for reporting these costs, which causes comparability challenges. We anticipate setting these standards and building cost trend lines going forward, with this report serving as our baseline. For asset class level detail on direct and indirect costs, please refer to Attachments D and E respectively. INV253

7 Page 7 Peer Comparisons Data for peer comparisons were compiled and prepared by two third party cost measurement service providers utilizing various customized methodologies. Data in this section is strictly for benchmarking purposes and differs from CalSTRS reported costs due to the use of estimates and smoothing factors in the peer comparisons. Based on a comparison of 15 global peers from $72 billion to $485 billion in AUM, CalSTRS investments was a low cost fund. 1 CalSTRS investment cost of 42.5 bps was below its expected cost of 49.7 bps, demonstrating our fund was low cost compared to peers, given an identical asset mix. 1 CalSTRS saved 7.2 bps over the expected investment costs, which equates to approximately $135 million saved compared to its peers. 1 Based on a comparison of 23 domestic peers with over $20 billion in AUM, CalSTRS investments was low cost at 29.5 bps compared to peers at 42.7 bps. 2 For further details on peer comparison, please refer to Attachment F. CONCLUSION We believe what we have presented is a comprehensive cost report. Reducing costs has been and remains a key initiative for the Investment Branch. We understand the importance of monitoring and measuring all costs and their role in meeting our policy objectives. CalSTRS staff has developed this pioneering investment cost reporting standard for direct and indirect costs across all asset classes and investment strategies that make us one of the frontrunners amongst our peers. Internal staff worked closely with our project consultants in preparing, developing and validating these reports. Compiling this extra cost data was valuable, but it also comes at an estimated total cost of $425,000 per year, excluding internal staff costs of over 1,500 hours. Staff and Pavilion are available to answer any questions you may have regarding this report. We will be working closely with Pavilion starting early 2017 to gather relevant 2016 calendar year costs for our private assets. Separately, we will work with third party cost measurement service providers to monitor our effectiveness in managing costs for 2016 compared to our peers. We will continue to partner together with other institutional investors and organizations (e.g. ILPA) to develop standardized cost reporting practices across all the asset classes to enhance accuracy and transparency, and improve benchmarking. These efforts and enhancements of our annual investment cost reports will strive to provide the Committee the most meaningful investment cost information. 1 Data collected and compiled by CEM Benchmarking, Inc. for calendar year Data collected and compiled by RVK, Inc. for period ending June 30, INV254

8 Page 8 Prepared and Recommended by: Shifat Hasan, Associate Portfolio Manager Melissa DaRonco, Associate Portfolio Manager April Wilcox, Investment Operations Director Debra Smith, Chief Operating Investment Officer Reviewed by: June Kim, Director of Global Equity Steven Tong, Director of Innovation & Risk Glenn Hosokawa, Director of Fixed Income Mike DiRé, Director of Real Estate Margot Wirth, Director of Private Equity Paul Shantic, Director of Inflation Sensitive Anne Sheehan, Director of Corporate Governance Michelle Cunningham, Deputy Chief Investment Officer Christopher J. Ailman, Chief Investment Officer INV255

9 Partnership/ Fund Expenses Global Equity Corporate Governance Fixed Income/Cash Real Estate Private Equity Inflation Sensitive Absolute Return INV256 Page 9 Asset Class/ Investment Strategy Base Management Fees Performance Fees Attachment A Investment Cost Report Outline CalSTRS Internal Salary CalSTRS Operating Expense CalSTRS Other Expenses (advisor, consultant, systems) Brokerage/ Commission Transaction Fee Soft Dollar Services Profit Sharing (carried interest) LEGEND included in report included in report, previously excluded included in report, terminology clarified not included in report -- not applicable

10 Basis Points INV257 Page 10 Attachment B Comprehensive Internal/External Cost Report by Asset Class/Investment Strategy* (as of December 31, 2015 in 000s) Asset Class/ Investment Strategy Net Asset Value Ending Market Allocation Manager Fee Internal Salary Operating Expense Other Total Expense Global Equity $ $ 103,681,262 56% 130,816 8,405 8,906 41, , U.S. Equity External 24,901,578 13% 28,834 1, ,558 40, Internal 41,397,693 22% - 2, ,563 7, Non U.S. Equity External 32,776,907 18% 52,692 2, ,958 74, Internal 268,473 0% U.S. Equity Corp. Gov. External 2,926,621 2% 30,758 1,025 6,814 5,276 43, Non U.S. Equity Corp. Gov. External 1,409,989 1% 18, ,998 2,601 23, Fixed Income 30,175,203 16% 10,431 4, ,395 18, Core Internal 24,398,843 13% - 3, ,477 5, Opportunistic External 5,241,189 3% 10, , Internal 535,171 0% Real Estate (External) 25,789,619 14% 162,559 4,537 56, , , Private Equity (External) 17,178,300 9% 195,597 4,093 56,262 89, , Inflation Sensitive 1,663,363 1% 11,462 1,481 5, , Infrastructure External 1,129,384 1% 11,462 1,152 5, , TIPS Internal 533,979 0% Absolute Return** 3,377,445 2% 35,851 1,855 12, , Currency External** (15,759) 0% 12, , Internal 172,357 0% HLP Internal 130,376 0% Innovation External 3,090,471 2% 23,183 1,439 12, , Cash (Internal) 4,234,395 2% Total $ 186,099, % $ 546,717 $ 25,312 $ 139,596 $ 239, , Custodial, Audit & Branch Support 12,517 12, Grand Total $ 186,099, % $ 546,717 $ 25,312 $ 139,596 $ 251, , *Report excludes carried interest **For Currency Management, Net Asset Value reflects gains/ (losses) on notional values and uses notional values for calculating basis points

11 INV258 Page 11 Attachment C Comprehensive Internal/External Cost Report by Private and Public Investments* (as of December 31, 2015 in 000s) External Management Costs Asset Class/ Investment Strategy Public Market Investments Net Asset Value Ending Market Allocation Manager Fee Internal Salary Operating Expense Other Total Expense Basis Points Global Equity 57,678,486 31% 81,527 4, , , Fixed Income 5,241,189 3% 10, , Absolute Return** (15,759) 0% 12, , Total $ 62,903,916 34% $ 104,626 $ 5,268 $ 85 $ 29,384 $ 139, Private Market Investments Corporate Governance*** 4,336,610 2% 49,290 1,523 8,812 7,877 67, Real Estate 25,789,619 14% 162,559 4,537 56, , , Private Equity 17,178,300 9% 195,597 4,093 56,262 89, , Inflation Sensitive 1,129,384 1% 11,462 1,152 5, , Absolute Return*** 3,090,471 2% 23,183 1,439 12, , Total $ 51,524,384 28% $ 442,090 $ 12,744 $ 139,416 $ 201,588 $ 795, Total External Mgt. Costs $ 114,428,300 61% $ 546,717 $ 18,012 $ 139,501 $ 230,972 $ 935, Asset Class/ Investment Strategy Public Market Investments Net Asset Value Ending Market Allocation Internal Management Costs Manager Fee Internal Salary Operating Expense Other Total Expense Global Equity **For Currency Management, Net Asset Value reflects gains/ (losses) on notional values and uses notional values for calculating basis points ***Includes Net Asset Value of $808 million in Sustainability Managers for Corporate Governance and $790 million in Stabilized Equity for Absolute Return 41,666,166 22% - 2, ,662 7, Fixed Income 24,934,014 13% - 3, ,530 6, Inflation Sensitive 533,979 0% Absolute Return** 302,733 0% Cash 4,234,395 2% Custodial, Audit and Branch Support 12,517 12, Total Internal Mgt. Costs $ 71,671,287 39% - $ 7,300 $ 95 $ 20,587 $ 27, *Report excludes carried interest Basis Points

12 INV259 Page 12 Asset Class/ Investment Strategy Attachment D Direct Cost Report by Asset Class/Investment Strategy (as of December 31, 2015 in 000s) Net Asset Value Ending Market Allocation Manager Fee Grand Total $ 186,099,586 $ 119,211 $ 25,312 $ 1,043 $ 70,544 $ 216, *For Currency Management, Net Asset Value reflects gains/ (losses) on notional values and uses notional values for calculating basis points Internal Salary Operating Expense Other Total Expense Global Equity 103,681,262 56% 94,958 8, , , U.S. Equity 66,299,271 36% 28,834 4, ,481 47, Non U.S. Equity 33,045,381 18% 52,692 2, ,698 73, U.S. Equity Corp. Gov. 2,926,621 2% 438 1, ,229 6, Non U.S. Equity Corp. Gov. 1,409,989 1% 12, ,601 16, Fixed Income 30,175,203 16% 10,431 4, ,395 18, Core 24,398,843 13% - 3, ,477 5, Opportunistic 5,776,360 3% 10,431 1, , Real Estate 25,789,619 14% - 4, ,343 10, Private Equity 17,178,300 9% - 4, ,827 11, Inflation Sensitive 1,663,363 1% - 1, , Infrastructure 1,129,384 1% - 1, , TIPS 533,979 0% Absolute Return* 3,377,445 2% 13,821 1, , Currency* 156,598 0% 12, , HLP 130,376 0% Innovation 3,090,471 2% 1,153 1, , Cash 4,234,395 2% Total $ 186,099, % $ 119,211 $ 25,312 $ 1,043 $ 58,027 $ 203, Custodial, Audit & Branch Support 12,517 12, Basis Points

13 INV260 Page 13 Attachment E Indirect Costs & Carried Interest Report (by Pavilion Alternatives Group, LLC) Report starts on next page.

14 Pavilion Alternatives Group is a trademark of Pavilion Financial Corporation used under license by Pavilion Alternatives Group, LLC in the U.S., Pavilion Alternatives Group Limited in the UK, Pavilion Alternatives Group (Singapore) Pte. Ltd., and Pavilion Advisory Group Ltd. in Canada Pavilion Alternatives Group. INV261 Page 14 Indirect Costs & Carried Interest Report Calendar Year 2015 California State Teachers Retirement System

15 Costs include management fees, partnership expenses, carried interest (i.e. profit sharing and performance fees) and other fees and expenses, as further summarized in the Scope section Any investment gains are reduced by management fees, partnership expenses and other fees and expenses paid by limited partners INV262 Page 15 Overview California State Teachers Retirement System Purpose: Obtain costs paid by CalSTRS across its investments Indirect costs are deducted from gross performance to arrive at net performance ILPA Fee Template ( Fee Template ) and alternate methods were utilized to obtain costs Objective: Achieve > 90% response rate from CalSTRS General Partners and Managers > 90% of CalSTRS private assets Net Asset Value ( NAV ) as of 12/31/15, or > 90% of CalSTRS total committed capital as of 12/31/15

16 CalSTRS asset classes: Private Equity, Real Estate, Inflation Sensitive, Corporate Governance and Innovation & Risk 571 investments, including Limited Partnerships, Separately Managed Accounts, Joint Ventures and Co-Investments Of the 571 investments, costs were obtained for 505 and are reported in the results, as further detailed in the Outcome section INV263 Page 16 Scope California State Teachers Retirement System Focus was on obtaining calendar year ( CY ) 2015 costs on a cash basis Scope of Costs for Calendar Year 2015 Costs Private Equity Real Estate Corporate Governance Innovation & Risk Inflation Sensitive Gross Management Fees Offsets Rebates 1 Management Fees 2 Partnership Expenses Other Fees & Expenses Portfolio Company Fees Capitalized Fees Other Fees 3 Profit Sharing 4 Carried Interest Included in report. New for CY 2015 reporting. -- Not applicable. 1 Management fees, as reported, is composed of gross management fees reduced by refunds of prior management fees paid and offsets. 2 Includes brokerage/commission transaction fees for Corporate Governance and Innovation & Risk. Includes soft dollar services. 3 Includes other fees not already captured in other categories. 4 Includes carried interest paid for Private Equity, Real Estate and Inflation Sensitive, and performance fees for Corporate Governance and Innovation & Risk.

17 The remaining 31% of the reported costs was collected from other sources for 158 investments; these sources included financial statements and supplemental schedules provided by General Partners / Managers Non-responders primarily include co-investments and General Partners / Managers who we expect to report costs in future years These included situations where Fee Templates were inconsistently or incorrectly populated, incomplete or when populated values were outside of reasonableness thresholds INV264 Page 17 Outcome California State Teachers Retirement System > 90% Response Rate Objective Met Costs reported for 505 investments, representing 91% of CalSTRS private assets 12/31/15 NAV obtained by Pavilion Of the costs reported, 69% was collected from Fee Templates completed by CalSTRS General Partners / Managers, representing 347 investments 9% 91% Costs Reported (505) No Response (66) 100% of Reported Costs Checked Reported costs were checked for reasonableness, which tested for overall accuracy and completeness Many submissions required follow-up with General Partners and Managers Corrected cost data is included in the results

18 Indirect costs totaled $747 million, excluding carried interest, representing 166 basis points of CalSTRS private assets 12/13/15 NAV obtained by Pavilion Carried interest consists of profit sharing or performance fees paid to General Partners and Managers who have met performance thresholds Carried interest is the single largest line item and represents CalSTRS share of the profits allocated to the General Partner / Manager INV265 Page 18 Results California State Teachers Retirement System CY 2015 Costs ($ in millions) Costs 1 Private Equity Real Estate Costs Paid by Asset Class Inflation Sensitive Corporate Governance Innovation & Risk Net Asset Value as of 12/31/15 $ 16,109 $ 21,906 $ 1,129 $ 3,522 $ 2,300 Percent of NAV 36% 49% 3% 8% 5% Management Fees $ $ $ 11.5 $ 35.9 $ 22.0 $ Basis Points Partnership Expenses Other Fees & Expenses Basis Points Total (Excluding Carried Interest) $ $ $ 16.9 $ 44.6 $ 34.5 $ Basis Points Carried Interest $ $ 75.0 $ - $ 16.5 $ Basis Points Total (Including Carried Interest) $ $ $ 16.9 $ 61.1 $ 49.3 $ 1, Basis Points Total $ Basis Points 2 1 Costs are net of offsets and rebates. 2 Basis points are based on CalSTRS' 12/31/15 NAV collected by Pavilion across 505 investments. Totals may not foot due to rounding.

19 The ILPA Fee Template is the most uniform way to obtain costs, although adoption has not been fully accepted or implemented Input of costs by General Partners / Managers in the Fee Template is inconsistent and requires extensive checking and confirmation Accounting treatment is complicated and needs to be considered to provide overall context to the reported results INV266 Page 19 Observations California State Teachers Retirement System CalSTRS has broken ground by reporting comprehensive costs across all asset classes Obtaining costs is time intensive and requires resources who possess the right expertise Costs obtained from alternate methods requires investment expertise and significant resources Costs are complex, and comparability to other years or plans is limited Other plans may report costs differently CalSTRS cost estimates from prior years do not include the same scope of costs Purpose is to assess CY 2015 costs on a stand-alone basis Trend lines will be built over time

20 INV267 Page 20 Observations (continued) California State Teachers Retirement System General Partners and Managers have been cooperative with the process Strong collaboration across CalSTRS and its managers contributed to the high response rate Response rates are expected to rise as adoption of cost reporting standards increases

21 This report relies on information provided by third parties, including California State Teachers Retirement System ( CalSTRS ), CalSTRS General Partners and/or CalSTRS custodian. The analysis included herein is dependent on such information being complete and accurate in all material respects. Additionally, the analysis utilizes forward-looking information that is derived in part from longer-term historical data provided by third-party sources and considerable effort is made to use available information to forecast these returns and cash flow patterns. In addition, projected results, if any, are based on a number of assumptions, including returns, fund size, economic terms, targeted investment allocation and other factors. Due to various risks and uncertainties, the projections in this presentation may differ materially from actual results or change significantly if any one or more of the assumptions are changed. As such, undue reliance should not be placed on such information. Nothing herein is intended to serve as investment advice, a recommendation of any particular investment or type of investment, a suggestion of merits of purchasing or selling securities, or an invitation or inducement to engage in investment activity. This report is solely for the use of CalSTRS. No part of it may be circulated, quoted, or reproduced for distribution outside of Pavilion Alternatives Group without express written approval from Pavilion Alternatives Group. Pavilion Alternatives Group is the combination of LP Capital Advisors ( LPCA ) and Altius Associates, Ltd., the parent company of Altius Associates Ltd. and Altius Associates (Singapore) Pte. Ltd. ( Altius Associates ). Pavilion Alternatives Group, LLC and Pavilion Alternatives Group Limited are both a registered investment advisor under the Investment Advisors Act of INV268 Page 21 Important Disclosures California State Teachers Retirement System

22 *Starting in 2014 hedge fund performance fees are being included for all participants. This is one reason for the uptick in costs relative to **42.5bps for CalSTRS was calculated using estimates and excludes partnership expenses, portfolio company fees and transaction costs. INV269 Page 22 Attachment F Peer Comparison (Developed by third party cost measurement service provider 3 ) Our total investment cost, excluding transaction costs and carried interest decreased from 51.7 bps in 2011 to 42.5 bps in Trend analysis is based on the 126 U.S. funds and the 15 peer funds with 5 or more consecutive years of data. Trend in Total Investment Cost (excluding transaction costs and carried interest) 3 Data collected and compiled by CEM Benchmarking, Inc. for calendar year 2015.

23 Page 23 Appendix A - Glossary. Absolute Return An asset class which consists of four strategies; innovation, overlay, hedge funds, and stable return. Asset Class/Investment Strategy Management Fee (Asset- Based and Performance- Based) Basis Point (Bps) As outlined in the Investment Policy and Management Plan (IPMP); a group of securities that have similar financial characteristics, behave similarly in the market place, and are subject to the same laws and regulations. CalSTRS asset classes and investment strategies include Global Equity, Corporate Governance, Fixed Income, Private Equity, Real Estate, Inflation Sensitive, Innovation Program, Absolute Return and Cash. A periodic payment made by an investment fund to the fund s investment advisor for investment and portfolio management services which is calculated as a percentage of assets under management. Performance-based fees are paid when the advisor generates positive returns above an agreed upon performance rate. As displayed in the cost tables, manager fees include both asset base and performance base manager fees for public markets and manager fees excluding performance for private markets. A unit of measure used in finance to describe the percentage change in value or rate of a financial instrument. One hundredth of the one percent or.0001 in decimal form. Brokerage Commissions/Fees An agent or agent s company charges to conduct transactions between buyers and sellers. Fees are charged for services such as purchases, sales, and advice on the transaction, negotiations or delivery. Carried Interest (Profit Sharing) A profit sharing mechanism by which general partners are compensated for their performance, usually after meeting a certain performance hurdle rate and returning all previously paid management fees to limited partners. Carried interest is distributed to the general partner as part of the profit before profits are paid to the limited partners (CalSTRS). Cash An asset class managed by the Fixed Income unit, assets consist of short term fixed income, liquidity and cash securities used to support the liquidity needs of the fund including the payment of benefits. Centralized Treasury System In 1949, the California Legislature amended Government Code Section to create the Centralized Treasury System (CTS) thereby requiring agencies of the State to deposit their money in trust with the Treasurer. The State Controller works in conjunction to produce the warrants (checks) and electronic fund transfers from the State Treasury, issuing payments such as state payroll, retirement rolls, Medi-Cal, personal income tax refunds, and payments to vendors. INV270

24 Page 24 Corporate Governance Program A program within the Global Equity asset class structured as limited partnerships or co-investments, focused on active management where managers take large individual positions and engage boards and management to undertake value driving change. Currency Management Program (CMP) A program within the Absolute Return asset class which overlays CalSTRS total exposure to foreign currencies. Generally uses notional values, not market value, when calculating basis points. Direct Costs External Asset Management External Management Costs Fixed Income Global Equity Costs that are paid out of the portfolios and expensed; they are paid utilizing the State Centralized Treasury System. Generally, these are management fees of public markets and internal administrative expenses. The outsourcing to external companies of asset management of various securities and other assets in order to meet specified investments goals. Costs that are associated with external management of investments. Generally these are management fees of private and public markets, partnership expenses and related internal support and oversight. An asset class comprised of investment grade and non-investment grade securities in both the U.S. and non-u.s. dollar base. Examples of Fixed Income securities include debt securities and derivatives (futures, options, swap agreements or forward agreements). An asset class comprised of U.S.; non-u.s. developed countries, and emerging markets securities. Examples of Global Equity securities include Exchange Traded Funds (ETF), stocks domiciled in the U.S., international securities traded on the exchanges of all countries contained in the MSCI All Country World Index ex U.S. and the MSCI Frontier Markets Index, units of participation in commingled index funds or trusts and derivatives (futures, options, swap agreements, structured notes, warrants, asset trusts or forward agreements). Home Loan Program Hurdle Rate Indirect Costs A program within the Absolute Return asset class, established by legislation in 1984, provides home ownership to qualified participants, which attributed to CalSTRS investment mortgage asset objectives. New home loan origination activity was suspended by the board on October 1, 2011; however staff continues to manage the existing assets. The rate of return that the fund manager must beat before collecting carried interest Management fees of private markets and other partnership expenses and portfolio company fees. INV271

25 Page 25 An asset class currently comprised of Infrastructure and Treasury Inflation-Protected Securities (TIPS), this asset class should produce Inflation Sensitive a relatively stable return stream, with a return level between equities and fixed income, and an overall higher correlation to inflation than equity or fixed income. Infrastructure Innovation Program Internal Asset Management Internal Management Costs Internal Salary Net Asset Value (NAV) Notional Amount Operating Expenses Other Expenses A strategy within Inflation Sensitive asset class comprised of limited partnerships, co-investments, commingled funds and publicly listed investments; spanning various industries such as energy resources and utilities, transportation assets, ports, water and waste and communications. A program within the Absolute Return asset class where the primary objective is to invest in strategies that do not fit any of CalSTRS existing asset classes and explore new concepts that are expected to improve diversification of the overall investment portfolio when fully implemented. Asset management of various securities and other assets in order to meet specified investment goals performed in-house by CalSTRS staff. Costs that are incurred for internal management of the investments and relevant operational support and administration. Salary and benefits paid to CalSTRS staff within the Investment Branch. The dollar value of the fund based on the total value of all the securities in its portfolio, any liabilities the fund has and the number of fund shares outstanding. The U.S. Dollar amount of the underlying assets. Includes travel, supplies, training and other Investment Branch support budget expenses. It also includes private asset related partnership expenses inclusive of accounting, IT, administration, audit & tax, bank fees, custody fees, due diligence, legal, organizational, travel and entertainment; may also include insurance, partnership level taxes and other expenses charged to the partnership. Includes advisor, consultant, risk and trade management system expenses. It also includes private asset related expenses, such as fees the General Partner / Manager or its related parties receive from the portfolio companies fees for consultancy services, broken deal fees, transaction and deal fees, board of director fees, ongoing monitoring fees and capital markets fees, as well as property management fees, construction management fees, project marketing fees, and other fees for real estate partnerships; may also include capitalized fees and expenses paid to the General Partner / Manager or its related parties that are rolled into the cost-basis of the investments, and fund of fund fees. INV272

26 Page 26 Overhead: Custodian, Audit & Branch Support Expenses Includes investment expenses not allocated to an asset class such as custodian, audit and other organizational support budget expenses. Partnership Expenses Also reflected as "Operating Expense" and includes private asset related partnership expenses inclusive of accounting, IT, administration, audit & tax, bank fees, custody fees, due diligence, legal, organizational, travel and entertainment; may also include insurance, partnership level taxes and other expenses charged to the partnership. Portfolio Company Fees Private Equity Public Markets Real Estate Soft Dollars Treasury Inflation- Protected Securities (TIPS) Transaction Costs (Public Market) Also reflected as "Other" expenses and includes fees the General Partner / Manager or its related parties receive from the portfolio companies for consultancy services, broken deal fees, transaction and deal fees, board of director fees, ongoing monitoring fees and capital markets fees, as well as property management fees, construction management fees, project marketing fees, and other fees for real estate partnerships; may also include capitalized fees and expenses paid to the General Partner / Manager or its related parties that are rolled into the cost-basis of the investments, and fund of fund fees. An asset class comprised of limited partnerships, direct investments, co-investments and secondary interests in leverage buyout, venture capital, distressed debt, mezzanine financing, natural resources and proactive private equity. The objective of private equity assets is to provide an enhanced investment return over those available in the public market. Refers to the market of securities that trade on an exchange and can be bought or sold by anyone in the general population. These securities typically trade in a systemized secondary market. An asset class comprised of direct real estate investments, joint venture and value added investments, and commingled funds in Office, Retail, Multifamily and Industrial sub categories. Soft dollars are the benefits provided to an asset manager by a broker-dealer as a result of commissions generated from financial transaction executed by the broker-dealer for client accounts or funds managed by the asset manager. Soft dollars, in turn might be used to pay for future commission expenses, research, advice etc. A strategy within Inflation Sensitive asset class that aims to preserve the purchasing power or to compensate for inflation experienced over the life of the investment. Costs incurred in making an economic exchange or trading in a public security, such as but not limited to commissions or bid ask spreads. INV273