Private equity profits called into question –

by aepxc

From 2001 to 2010, US pension plans on average made 4.5 per cent a year, after fees, from their investments in private equity. In that period, the pension funds paid an average 4 per cent 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.

“Assuming a normal 20 per cent performance fee, this would amount to about 70 per cent of gross investment performance being paid in fees over the past 10 years,” said Professor Martijn Cremers of Yale.

Private equity describes its fees as “two and twenty”, a 2 per cent management fee and 20 per cent share of profits. However, the management fee is usually calculated as a proportion of total capital committed by the investor, which takes time to invest.

So in the early years, the management fee can be a much higher proportion of actual cash invested. For instance, if a $1bn fund invests $100m in its first year, the $20m management fee would be 2 per cent of committed capital, but 20 per cent of invested capital for that year.