Funds wake up to high fees
If you have been holding private equity (PE) funds over the last cycle it will come as no surprise to be told that the industry is generally better at “enriching its own managers than producing investment profits”. That, at least, is the conclusion from an investigation into PE returns by the Financial Times. The good news is that those who invested in PE from 2001 to 2010 did make a positive return (4.5%), something that you could say makes the average PE manager superior to the average traditional fund manager.
The bad news, however, is that returns should have been a whole lot higher. Add up all the money US pension funds have paid to their managers over the last decade and, according to Yale’s Professor Martijn Cremers, “about 70% of gross investment performance” has gone in fees.
So what are these fees? Much the same as those in the hedge fund industry. The punter pays 2% of the value of their assets every year as a management fee, and then 20% of the value of any returns on their assets. But there’s an extra sting in the tail for PE investors: all hedge fund and PE investors pay these fees regardless of whether the money is actually invested or not, but while money you commit to a hedge fund is usually fully invested immediately, the money you put in a PE fund is not.
• Read the full editor’s letter here: Funds wake up to high fees.