So how should private equity fees imposed on limited partners be calculated?
According to a new study prepared for the Financial Times by academics at Yale and Maastricht University, from 2001 to 2010, U.S. pension plans on average generated a 4.5 percent return annually, after fees.
“In that period, the pension funds paid an average 4 percent of invested capital each year in management fees. On top of those, private equity often collects a variety of other fees and a fifth of investment profits.”
Whoa! Isn’t the standard management fee 2 percent? Yes it is, but this study took a look at returns and fees based on invested capital, as opposed to committed capital, which is how the industry traditionally calculates returns. Under this alternative approach, the fees charged to investors go sky high.
“Assuming a normal 20 percent performance fee, this would amount to about 70 per cent of gross investment performance being paid in fees over the past 10 years,” said one of the authors. And those jacked up fees accounts for the paltry 4.5 percent returns.
No matter how you choose to calculate things, we can all agree that returns were depressed significantly in the first decade of the century. From 1991 to 2000, pensions paid an average of just 2 percent of invested capital in management fees, and received a whopping 21 per cent returns after fees. The industry does not like this alternative approach and I doubt we’ll see it catch on.
For more:
- here’s the article
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