Translated from an artile which appeared in Icelandic Business publication, Viðskiptablaðið, on 9th Oct 2023 The founder of research and analytics company specialising in collecting and evaluating fees and performance data in investment management says that an examination in the UK has revealed an annual total cost of 3-10% of total assets.
On average, over a 15-year period studied by the British company ClearGlass, private equity fund fees – all-inclusive – ranged from 3 to 10% of total assets each year.
The founder of the ClearGlass, Christopher Sier, says that in general there is not much understanding of the fee systems of private equity funds and that the costs are much higher than most would have expected. Taking the commission into account, Sier says the funds have produced an average annual return of 12-15%.
Sier says he collects and processes a large amount of data on private equity funds in the UK, as ClearGlass works with approximately a thousand pension funds. The pension fund system in the UK is similar to that in Iceland, and just like here, the pension funds invest quite a bit in private equity funds.
"We have actually been working for several Icelandic pension funds since last year. As far as I can tell, however, there has been little investigation or benchmarking on what the value of the services such funds provide in Iceland compared to the fees they take, whether from pension funds or other asset owners."
During his lecture, Chris reviewed the figures that ClearGlass has collected and researched in that regard for the UK and presented the main results of that analysis. It was both the total cost on an annual basis and its breakdown over a 15-year period.
"I then reviewed the relationship between costs and the results that the funds were able to achieve on behalf of their clients, and how that pattern has developed over the years."
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In the UK, private market funds have been held in high esteem for years, but Sier says the situation has been getting worse for many of them in the last few months.
"As things stand today, private market funds have been shown a lot of interest, not least due to the government's emphasis on pension funds directing members' funds there, which in turn is based on the accepted belief that by doing so they are investing in British companies and thus the British real economy."
However, Chris and Clearglass' analysis has shown that the majority of their funds end up outside the country. The majority – around half of all such investment in the UK – goes west across the ocean to the US and a further fifth to other countries so only 30% actually remains within the UK economy.
"There doesn't seem to have been much behind it"
When asked where the idea came that investing in private market funds implies special support for the British real economy, Chris can't help but laugh and says it's hard to say.
"When a big question is asked... There doesn't seem to have been much behind it. No data or anything else has ever been pointed out in support of this, as it turns out that there is little or nothing in this."
The hard data collected by Clearglass shows, on the contrary, that this money is mostly looking elsewhere. "Investing in British private market funds is an investment in the business life of the United States and the world as a whole much more than in the British one."
Chris says that the demand for private market funds as investment options has shrunk significantly over the past year, not least as rising interest rates have driven down the market price of bonds in the portfolios of British pension funds and thus greatly increased the percentage of unregistered assets in the fund's total assets to or beyond the limits set for them in this regard.
"In some cases, the share of the asset class doubled, without any change in its book value. There is a problem. If the share of unregistered assets doubles overnight at a pension fund, it has simply become too much."