Do Your Pension People Know the Fees?
Ed. Note: This article, written by Yves Smith, originally appeared on NakedCapitalism.com. We felt it was more than worth sharing.
As we’ve mentioned, many of the fees and costs that private equity investors bear are hidden from them by virtue of being shifted to the portfolio companies. For instance, private equity firms charge what Oxford professor Ludovic Phalippou has called “money for nothing” or “monitoring fees”. Many also charge “transaction fees” on top of the large fees they pay to investment bankers for buying and selling companies. The reason that those charges are opaque to private equity limited partners is that they have no right to see the books and records of the investee companies.
But surely limited partners like private equity investor heavyweight CalPERS know what they are paying in contractually specified fees, namely the annual management fee and the so-called carried interest fee, which is a profit share (usually 20%) which usually kicks in after a hurdle rate has been met (historically, 8%), right?
Think again. Private equity firms simply remit whatever they realize upon the sale of a company, net all those lovely fees and expenses (which include hefty legal fees) and any carry fee they think they think they are entitled to take.
Put it this way: if you were selling your house, would you hire a firm to provide a turnkey service (spruce up the house, negotiate the sale with a buyer, and take care of all the closing costs) and not demand an accounting of the gross price and what was deducted to arrive at your net proceeds? Yet it’s standard practice all across the industry for private equity investors simply to receive distributions with no explanation at all.