Your Pension Scheme and Private Equity: What About Fees?

The Financial Times recently published an article, “When it comes to your pension, don’t believe the hype about private equity”, scrutinising the push into private equity by UK pension funds, which is being encouraged by policymakers and the investment industry. The aim of this push is to achieve higher returns and diversification, whilst supporting the Government’s broader economic strategy. The article cautions that these assets are very complex, illiquid, and not always suitable for retail investors.

The ongoing debate around private equity tends to focus on one thing: achieve higher returns.

However, what’s discussed far less, by industry, policymakers, academia and financial media, is the cost of private equity. Private equity fees are not just higher than traditional asset classes, they’re also significantly more opaque.

New research based on ClearGlass data, obtained through the Cost Transparency Initiative (CTI) framework, a standardised cost and fee disclosure mechanism for institutional investors, shows that private equity fees are far more complicated than the widely held belief of ‘2-and-20’ – 2% management fee and 20% carried interest.

One particularly notable finding is the discovery that investors in leveraged buyout funds, during the investment period, often pay upwards of 50bps in interest expense. Interest expense is the cost of financing provided to the fund, typically in lieu of drawing down committed capital. This financing is often part of a Capital Call Facility (CCF), the use of which has increased dramatically since 2015. However, the findings using ClearGlass data shows that the cost of this financing is material, and therefore more scrutiny is needed on its use by private equity firms.There is limited research as to whether the use of these facilities and fund financing provides a material uplift to fund performance. As allocations to private equity continue to rise, a more balanced conversation is needed, one that looks at the broader picture of value-for-money.

ClearGlass collects institutional costs and fees through the CTI framework, on behalf of institutional investors, enabling them to identify the sources of all costs in their investment portfolio. ClearGlass also benchmarks these costs alongside performance, enabling investors to understand the value-for-money being delivered by their private markets asset managers.