Private Equity, Like Hedge Funds, Is Better For Managers Than For Investors

A blog about business and economics.
Jan. 25 2012 4:27 PM

Private Equity, Like Hedge Funds, Is Better For Managers Than For Investors

Regardless of its macroeconomic consequences, the private equity industry is clearly lucrative. But lucrative for whom? Hedge funds, for example, are a great way of enriching hedge fund managers but don't seem to actually make money for investors. Private equity is perhaps not so different:

Private equity has proved better at enriching its own managers than producing investment profits for US pension funds over the past decade, according to a study prepared for the Financial Times by academics at Yale and Maastricht University. [...] From 2001 to 2010, US pension plans on average made 4.5 per cent a year, after fees, from their investments in private equity. In that period, the pension funds paid an average 4 per cent of invested capital each year in management fees. On top of those, private equity often collects a variety of other fees and a fifth of investment profits.
Advertisement

That's the FT citing Yale's Martijn Cremers. The industry trade association defends private equity's fee structure as industry standard, but nobody is disputing that it's standard. The question is whether there's any reason to believe the private equity game, or any other sub-set of investing, can reap returns large enough to justify such large management fees. You can easily imagine telling a story in the 1980s about how the brand-new innovation of leveraged buyouts is able to exploit long-simmering market inefficiencies and reap gigantic returns. But once the asset class becomes mature, all the low-hanging fruit has already been picked and you're left with the same basic problem as in any effort to beat the market.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Doublex

Crying Rape

False rape accusations exist, and they are a serious problem.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Why Men Can Never Remember Anything

The XX Factor
Sept. 19 2014 1:11 PM Why Men Can Never Remember Anything

The Music Industry Is Ignoring Some of the Best Black Women Singing R&B

How Will You Carry Around Your Huge New iPhone? Apple Pants!

Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

Television

The Other Huxtable Effect

Thirty years ago, The Cosby Show gave us one of TV’s great feminists.

There’s a Way to Keep Ex-Cons Out of Prison That Pays for Itself. Why Don’t More States Use It?

No, New York Times, Shonda Rhimes Is Not an “Angry Black Woman” 

Brow Beat
Sept. 19 2014 1:39 PM Shonda Rhimes Is Not an “Angry Black Woman,” New York Times. Neither Are Her Characters.
Behold
Sept. 19 2014 11:33 AM An Up-Close Look at the U.S.–Mexico Border
  News & Politics
Foreigners
Sept. 19 2014 1:56 PM Scotland’s Attack on the Status Quo Expect more political earthquakes across Europe.
  Business
Moneybox
Sept. 19 2014 12:09 PM How Accelerators Have Changed Startup Funding
  Life
Inside Higher Ed
Sept. 19 2014 1:34 PM Empty Seats, Fewer Donors? College football isn’t attracting the audience it used to.
  Double X
The XX Factor
Sept. 19 2014 1:11 PM Why Men Never Remember Anything
  Slate Plus
Slate Picks
Sept. 19 2014 12:00 PM What Happened at Slate This Week? The Slatest editor tells us to read well-informed skepticism, media criticism, and more.
  Arts
Movies
Sept. 19 2014 2:06 PM The Guest and Fort Bliss How do we tell the stories of soldiers returning home from war?
  Technology
Future Tense
Sept. 19 2014 12:38 PM Forward, March! Nine leading climate scientists urge you to attend the People’s Climate March.
  Health & Science
Medical Examiner
Sept. 19 2014 12:13 PM The Most Terrifying Thing About Ebola  The disease threatens humanity by preying on humanity.
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.