Fee Variation in Private Equity
The private capital industry has experienced a meteoric rise over the past two decades, with estimates of capital invested in vehicles like private equity and venture capital now exceeding $10 trillion. With this growth, there has been a corresponding increase in calls for greater transparency around the fees and operational structures of private market funds, […]
Juliane Begenau is an Associate Professor of Finance at Stanford Graduate School of Business, and Emil Siriwardane is an Associate Professor of Business Administration at Harvard Business School. This post is based on their recent article forthcoming in the Journal of Finance.
The private capital industry has experienced a meteoric rise over the past two decades, with estimates of capital invested in vehicles like private equity and venture capital now exceeding $10 trillion. With this growth, there has been a corresponding increase in calls for greater transparency around the fees and operational structures of private market funds, especially given the amount of capital inflows from public defined-benefit pensions around the globe. Private capital funds, like private equity, are typically governed by complex limited partnership agreements (LPAs). LPAs, which are rarely observable to fund outsiders, are often further modified by so-called side letter agreements. This contracting environment makes it difficult to answer basic questions about costs in this industry, like for instance whether fees are set uniformly within funds or if some investors (LPs) consistently pay lower fees.
