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Private equity managers happily ride a flying carpet created from money investors pay them for doing nothing.
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Private equity managers charge fees on committed, uninvested capital because they can.
What’s better than getting paid 1% to manage people’s money?
Answer: Getting paid 2% to not manage it—for doing nothing.
In certain niches of the money management industry it is common practice for managers to charge fees—typically 2%– on money merely committed to a venture—money the manager does not even manage yet.
This amounts to adding insult to injury since these types of investment funds already charge exponentially higher fees than traditional stock and bond managers.
In 2017, reportedly fees on committed, uninvested capital were the norm in private equity funds. That is, 91% of private equity managers demanded investors pay fees today on money investors had committed to invest over time, say, over the next 10 years.
In my opinion, there is no justification for these bogus fees that virtually all private equity managers charge, and investors pay without objection.
When, in my forensic investigations, I bring millions in fees paid on committed, uninvested capital to the attention of supposedly savvy institutional investors (aka fiduciaries overseeing other people’s money), initial disbelief and embarrassment swiftly turns to defensiveness.
Overnight, victims and perpetrators agree there’s nothing wrong with a failing pension paying even tens of millions to Wall Street for nothing.
Private equity managers charge fees on committed, uninvested capital because they can—because they’ve convinced investors these funds will produce stellar returns.
An intelligent investor focuses on fees because, unlike performance, fees are the one thing the investor can control.
On the other hand, many so-called “sophisticated” investors don’t focus on, or give a damn about, fees. They will pay anything if they believe a money manager is going to make them big money.
Ironically, the more underfunded a pension, the more willing it is to pay outlandish fees –to gamble itself out of a hole.
As we saw in Madoff, many investors, even today, can be persuaded they’re lucky to have their money managed by the priciest gunslingers.
So, the lesson is, if a money manager’s sales pitch is good enough, he can even get away with outrageously high fees for doing nothing.
The sky’s the limit.