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August 10, 2018

US pension funds and private equity: enormous fees, poor returns

An article in the UK Financial Times from August 6 reports in these words on the conclusions from a new study of US private equity fees and returns since 2006: "US private equity managers have extracted $400bn in fees and expenses from investors since 2006 but on average they failed to beat the returns from an S&P 500 tracker fund."

The (as yet unpublished) study from Oxford Saïd notes that institutional investors, including pension funds, who piled even more money into private equity investments in the hope of boosting returns following the global financial meltdown, have difficulty navigating the "complex and opaque agreements that allow private equity managers to charge multiple layers of hidden fees" (see also New report documents private equity fee racket published on this site).

Pension funds contributed significantly to the more than USD 2 trillion in money raised by US private equity funds from 2006-2015. "We do not know the exact total of feeds and expenses paid by investors because a lot of effort is spent by private equity managers to ensure this information remains as secret as the recipe for Coca-Cola", according to Saïd finance professor Ludovic Phalippou who worked on the study.

The fund managers are sitting on an accumulated USD 1.7 trillion in uninvested money ("dry powder in industry parlance) on which they also collect 'management' and other fees.