Big Investors Rebelling Against Private Equity Fees

In a remarkable and long-overdue change in attitude, institutional investors are starting to tell private equity titans that they think they don’t earn their outsized pay. As Oxford professor Ludovic Phalippou explained in a 2011 paper, the prototypical 2% management fee, 20% profit share structure is deceptive. Remember that that 2% fee starts ticking as soon as the investor makes his commitment to the fund. But no money has passed hands. The private equity fund isn’t managing any money at that time, just on the hunt for deals. It typically takes several years for all the funds to be invested. Phalippou estimates that the effective management fee level, as a percent of funds at work, is a mind-boggling 4%.