Adding fuel to the debate over private equity fees, a new study has found that PE firms have charged $20 billion in hidden fees to clients over the past two decades.
The so-called portfolio company fees were charged to nearly 600 U.S. companies that were bought by private equity managers between 1981 and 2013 for a total value of $1.1 trillion, according to Oxford University and Frankfurt School of Finance & Management researchers.
The fees over the years were $20 billion, reducing the value of the businesses when they were sold or publicly listed. Investors in private equity funds know “monitoring fees” and “transaction fees” are charged but don’t negotiate the details.
“These fees are effectively hidden from investors,” Ludovic Phalippou, a co-author of the report and an associate professor at Oxford University’s Saïd Business School, told the Wall Street Journal. “Investors usually don’t see these fees and don’t know how much they are paying.”
The fees are “contentious” because they are charged to companies whose boards are controlled by private equity firms, the report said.
Private equity firms have been under pressure to be more transparent about what they charge investors and their fees are already being examined by regulators.
The U.S. Securities and Exchange Commission last year warned the $3.5 trillion industry to expect increased scrutiny after finding numerous examples of fees and expenses being charged inappropriately to investors.
Blackstone Group LP agreed to pay $39 million to the SEC in October to settle charges over its fee practices, while KKR paid almost $30 million in June to settle charges that it improperly allocated expenses.
“As long as there is not any transparency it will be difficult to track these,” Jos van Gisbergen, a senior portfolio manager at Netherlands-based private-equity investor Syntrus Achmea, told the WSJ. “A lot of people are frustrated with that.”
Phalippou noted that private equity managers often pay some of the hidden fees back to investors via reductions in annual management fees, but he believes the reductions could go further. “The official expense ratio reported by investors can be significantly understated,” he told the Financial Times.