Private-equity fee hurdles pose challenges for certain fund investors
Panelists at an investment conference have observed that the expenses associated with investing in private equity pose a challenge for certain investors in fully embracing this asset class. However, these costs also motivate other investors to demand more favorable conditions from fund managers.
Steven Meier, the chief investment officer at the New York City Retirement System, emphasized the importance of being highly discerning in order to ensure that they are obtaining favorable relative value while making commitments to asset managers. The system, valued at $253 billion, oversees assets that are used to support the promised benefits for approximately 300,000 police officers, teachers, firefighters, and other beneficiaries. According to Meier, the system has allocated $63 billion to alternative-asset strategies, which encompass private equity, real estate, and infrastructure.
“We are highly proactive when it comes to negotiating our fees,” Meier stated on Tuesday at the SALT investment conference in New York.
Institutional investors are becoming more aware of the significance of alternative assets in diversifying their portfolios and enhancing their returns. Despite the growth of private markets in the last ten years, the number of publicly traded corporations in the United States has consistently decreased.
However, the exorbitant expenses associated with investing in alternative options might be a significant obstacle, even for major global investors. According to a study conducted in 2022 by experts from Ohio State University and Oxford University, the average management and performance fees imposed to investors in buyout funds consume 6 percentage points of their returns.
Norges Bank Investment Management, the entity responsible for managing Norway’s $1.6 trillion sovereign-wealth fund, the largest in the world, requested approval last year to engage in private-equity funds. However, press sources indicate that the Norwegian government rejected the request last month, citing worries about expenses and transparency. The statement indicated that it had the potential to reassess the decision at a later time.
“Given that the fund is owned by the Norwegian population, we have concerns regarding transparency and significant fees,” stated Carine Ihenacho, Norges Bank’s top governance and compliance officer, during the panel discussion on Tuesday.
Several pension funds have attempted to decrease private-equity expenses by co-investing with fund managers or making direct investments. Canadian pension executives state that this technique is especially favored in Canada, where the consolidation of pension funds over time has resulted in the formation of huge institutions that can negotiate more favorable terms with private fund managers and provide direct support to enterprises.
Yana Kakar, a managing director and head of Americas at Caisse de dépôt et placement du Québec (CDPQ), stated that CDPQ manages around $330 billion for numerous pension and insurance programs in the province of Québec. Kakar stated that approximately 85% to 90% of CDPQ’s capital is invested directly, rather than being managed by third-party fund managers.
“The desired objective is to actively manage assets,” she stated. “In the field of infrastructure investing, we will have ownership, operational control, and design authority. We will also act as the investor, overseeing the entire process from start to finish.”
Smaller U.S. endowments without the same bargaining strength as larger ones have difficulties because to the high fees charged by private-equity firms, according to Geeta Kapadia, the chief investment officer at Fordham University in New York. The school’s endowment oversees approximately $1 billion. According to her, Fordham frequently relies on smaller fund sponsors that are more adaptable.
“We are determined to ensure that the fees are commensurate with our activities,” Kapadia stated. “That is the main reason why we choose to collaborate with smaller private-equity firms, as they are more inclined to engage in that discussion.”
She advocated for investors to collaborate in demanding increased transparency and alignment from private-capital fund managers with regards to their fee structures.
“It is an intensely sensory and deeply individual experience,” she supplemented. “Each dollar I allocate towards fees is a dollar that I am unable to contribute towards scholarships for students.”
