Private equity: A fee too far [pdf]

Private equity: A fee too far [pdf]
russellsage.org

> One issue the regulatory agency raised was conflict of interest [… between managers and stakeholders]

combined with

> Mr Sudarskis argues that the most vulnerable parties are not the investors, who recieve a share of the fees and willingly sign a contract with their fund managers, _but portfolio companies._

This conflict of interest goes far beyond the monetary aristocracy!

Am i the only one who sees it between the interest of individuals vs society?! Is this question so darn complex or am i the crazy one here?

This article dares to speak about "extraction" but does not reflect one key metric: reinvestment/saving rate (down to the individual/per income). A household with small margins is much more impacted by greedflation and much more unlikely to not spend and hand down absurd wealth.

So i humbly cannot contain another dull question: Extracting from and to whom in general?

The reason why it bothers me so much is, you can see this elefant everywhere ... and the guys standing around, arguing what snake its tail might be.

It's sad that people's jobs get eliminated. But we have accepted (for good reason) that jobs are never guaranteed. So that's life.

Everything else here is basically just fear-mongering.

> If they make a profit then they're actually adding value.

Martin Skrelli. [0]

Please tell me what and where his added value is. And please no fear mongering about the rich getting poorer.

[0] https://en.m.wikipedia.org/wiki/Martin_Shkreli

I can think of a few reasons why they don't.

They need 'uncorrelated returns' which PE provides, and it might be worth paying extra fees for this. That does not mean the fees are fair, it just means there is not enough competition. Also institutional investors might not perfectly rational and informed, as the article notes some of these fees are somewhat obscured and investors might be looking more at direct management fees. Relatedly, there is probably an asymmetry of skills and power, as institutional investors are second or third tier firms whereas PE firms are top tier. Finally, there is the usual agency problem, institutional investors are not sufficiently incentivised to reduce fees, because the fees are effectively paid by people who put the money in the funds, namely you and I, via pension funds or sovereign wealth funds.

> Do we need to somehow protect institutional investors who manage tens of billions of dollars? Are they a victim that needs protection?

We need to protect the people who ultimately put the money in the funds, not the chain of asset managers extracting their rents on top of it. Historically for PE these were high net worth individuals, so nobody cared, but nowadays they are California's teachers and Japanese pensioners.

> How is it all that different from a company owned by a majority shareholder who makes bad business deals? What do institutional investors do then? Presumably they use their voting power to stop it, or else just exit their position?

It is a similar agency problem I think. It's easier if you're investing directly in companies, because there are many companies competing with each other to attract institutional investors' money, so they care more about making investors happy.

The underlying question is why aren't PE firms competing with each other to provide lower management fees to attract more institutional money. This has happened in public market funds, with Vanguard for example providing very low fees. But for some reason it doesn't seem to happen in private markets. PE firms compete on where to put the money, trying to win deals against each other, but do not seem to compete that much on where they get the money. I don't know why. It could be that quantitative easing made money so abundant that they had more money than deals to spend it on, so there was no reason to compete.

Edit: to be fair this seems to be happening somewhat now [1]

[1] https://www.ft.com/content/05b0d935-678b-418c-8a86-b1a99bb04...