August 13, 2016
In the movie Jerry Maguire, Rod Tidwell is not sure he can trust the title character, his agent, to represent his interests fairly. He screams, “Show me the money, Jerry!” to emphasize Maguire’s obligations to his client. Over the past five years, LPs and regulators have been having similar conversations with private equity GPs. In this context, “show me the money” means full transparency about what LPs pay for and the revenue GPs actually receive.
Fees and expenses continue to garner significant scrutiny in the private equity industry—receiving an almost constant glare from the press, regulators, institutional investors, pension beneficiaries and federal and state governments. In Part 1, Uncovering the Costs and Benefits of Private Equity, we investigated the fees charged in private markets, and whether the returns justify these costs. Here , in Part 2, we explore trends in fees and expenses and how the energy and attention given the subject have changed the behavior of market participants.
Based on our review of regulatory actions, as well as our interactions with GPs and LPs, we conclude that behaviors with respect to fees and expenses have improved: offsets are higher and there is more disclosure across the board. Notwithstanding these improvements, a number of barriers remain. To continue moving the industry in this positive direction, there are a number of steps that LPs large and small can and should take.