Retail investor access to private equity funds is coming at a high price.
Tender offer and interval funds are charging investors up to 5.49 percent in fees to manage their capital, a new analysis shows.
Cliffwater, which runs an interval fund of its own, analyzed the fees charged by interval and tender offer funds to wealth management and institutional clients. The firm found that on average, all-in expenses are 2.91 percent for these funds.
The sample set of 19 funds that represent $35 billion in assets under management showed that fees range from as low as 0.96 percent to as high as 5.49 percent. Cliffwater anticipates that its sample set will grow as the market does.
“There’s a strong interest from wealth management allocators and even some institutional allocators, but there’s a lack of data for them to access across funds,” said Phil Huber, head of portfolio solutions at Cliffwater. “Some of the traditional research firms haven’t yet started to cover these funds. There’s not that same ability for a CIO or investment committee to look across a category and do a comparative analysis, especially at a granular level.”
The overall price tag is a blend of management and incentive fees, acquired fund fees and expenses (the underlying management fees passed on to investors), interest on loans, and administrative, custodial, and legal costs.
The management fee tends to make up the largest portion of these fees, coming in at 1.44 percent on average. Even the highest management fee included in the survey (1.9 percent) still clocks in under the traditional 2-and-20 cost of traditional private equity.
But because interval and tender offer funds typically operate as funds-of-funds, they pass on underlying management fees to investors. On average, the passed-on fees are 71 basis points. At the highest, they are 1.55 percent.
“What’s important for allocators is to not just take the headline expense ratio at face value, but really to look under the hood and see how it compares to the broad universe,” Huber said. He noted that a good example is secondary funds. These may have high acquired funds and fees components, while funds that have more co-investments may have a lower AFFE component, but a higher management fee.
In order to attract new clients, many of these funds offer expense waivers — short term discounts for investors. On average, these expense waivers are 28 basis points, although the highest discounts seen are 1.9 percent. According to Huber, 42 percent of the funds included in the analysis offered discounts.
Surprisingly, according to Huber, the larger funds did not charge lower expense fees. It seems, he noted, that economies of scale do not result in reduced costs — at least when it comes to what these funds pass onto their clients.
