The Bill for Hidden Private Equity Fees: $4 Billion

Pew Charitable Trusts says returns from private equity investments may not justify the high cost.


As public pension plans in the U.S. increasingly invest in private equity and other alternatives, funds may be paying more than $4 billion annually in unreported fees, according to Pew Charitable Trusts.

The hidden costs of private equity investments – which include carried interest, monitoring costs, and portfolio company fees – were not reported as investment expenses among most of the 73 large public funds Pew examined, according to a report this week from the non-profit group. For example, Pennsylvania’s two public pension plans, the Public School Employees Retirement System and the State Employees Retirement System, don’t disclose carried interest in their annual reports.

Costs aren’t fully transparent because some plans don’t consider carried interest – the 20 percent profit cut taken by private equity firms – as an investment fee, according to the report. Another reason is that “opaque reporting” by private equity managers leads pension funds to view carried interest as a non-separable expense that doesn’t have to be reported as an investment cost according to accounting standards.

“These trends underscore the need for transparency on plan performance and attention to the impact of investment fees on plan health,” said Greg Mennis, director of Pew’s public retirement plans project, in a statement accompanying the report.

The more than $4 billion in unreported investment fees, primarily performance payments made to private equity managers in 2014, is about 40 percent above the $10 billion in reported investment expenses that year, the report shows.


Pennsylvania’s Public School Employees Retirement System and State Employees Retirement System, which manage a combined $80 billion in pension assets, increased their allocation to alternatives from 18 percent in 2006 to 49 percent of their portfolios in 2014, according to the report. The shift drove reported their annual fees from alternative investments to more than 0.8 percent of assets, already one of the highest in the U.S., Pew said. When accounting for their undisclosed carried interest for private equity, fees increase to over 0.9 percent of assets, or more than $700 million annually.

The average value of undisclosed private equity fees could equal up to 1.5 percent of assets per year, Pew said, citing an estimate from CEM Benchmarking, which provides analysis for institutional investors. The report suggests pension funds should consider whether returns from private equity and other alternative investments will justify fees, as Pew found that recent or rapid entries into alternatives had the weakest 10-year returns.

There are efforts underway to make fees more transparent. The Institutional Limited Partners Association released a reporting template last year that would establish standards for fee and expense reporting for institutions and fund managers.

Several major funds have already adopted practices to disclose fees, including the California Public Employees’ Retirement System, which in 2015 said it would begin reporting total carried interest paid to private equity. The Missouri State Employees’ Retirement System reports fees by asset class and for each external manager, a particularly thorough practice, Pew noted in its report.

While plans vary widely in their investment choices within the alternatives class, almost a third of the public pension funds examined by Pew had more than 10 percent of assets in private equity in 2014, while 15 percent had more than 10 percent in hedge funds. In 2014, CalPERS eliminated its $4 billion hedge fund investment program, citing high costs, according to the report.

“The data do not reveal a best or one-size-fits-all approach to successful investing, but there is a uniform need for full disclosure on investment performance and fees,” Pew said.