Beyond 2 and 20: Unmasking the True Cost of Private Capital

Private capital investing continues to be an important area of discussion in the institutional space. However, one question has been largely unexamined what fees are investors actually paying? Oliver Bell, Head of Research at ClearGlass Analytics, recently addressed this subject at a CFA UK Seminar.

The “Wednesday Webinar at One” session, What fees do investors actually pay for private capital funds, offered valuable insights into the realities behind private equity fee structures. The session explored the transparency challenges that have long surrounded private equity, where costs are often perceived as high and difficult to assess compared with traditional asset classes. The session is based on ongoing research produced by Oliver, as well as Professor Iain Clacher at the University of Leeds, and Professor Tim Jenkinson at the University of Oxford.

Oliver drew on data gathered by ClearGlass through the Cost Transparency Initiative (CTI) framework. This unique dataset enables asset owners and managers to analyse costs and fees at a granular mandate level, revealing where cost burdens truly arise within private equity investments for institutional investors.

ClearGlass Research has identified that the widely referenced “2 and 20” model, typically a 2% management fee and 20% carried interest, rarely reflects investors’ actual cost burden in private equity funds these days. Headline management fee rates differ not only by asset class, but there are also additional charges and less-visible expenses that materially affect overall investment outcomes.

Of particular note was ‘Interest Expense’ - fees paid to the fund for financing provided to the fund, usually from use of Capital Call Facilities (CCFs). These fees can add considerable cost burden to LPs, with costs upwards of 50bps in leveraged buyout funds.

Furthermore, management fees are not stable throughout the fund lifecycle, and are in fact front-loaded, meaning highest at the start of the fund lifecycle, such as during the investment period. After 10 years, fund management fees are almost nominal, and very rarely above 40bps in leveraged buyout funds.

The session provided practical guidance for both buy-side and sell-side professionals, helping attendees better understand average costs, interpret fee disclosures, and apply transparency insights to strengthen investment decision-making. Investment professionals, private capital specialists, and anyone involved in institutional asset management benefited from a clearer view of how fees influence long-term performance and value creation.

For institutional investors, gaining a clearer picture of total investment costs can have a meaningful impact on portfolio outcomes. In one ClearGlass case study, an institutional investor discovered they were paying over £1million per year in interest expense fees alone, representing approximately 15% of total costs for their entire investment portfolio. These expenses would have been extremely difficult to identify outside of the CTI framework and analysis provided by ClearGlass.

Improving transparency on investment costs and performance remains critical to create stronger alignment between institutional investors and their asset managers. Institutional investors and their investment advisors can engage with ClearGlass to help them optimise outcomes and value.