| Thanks for the well thought out reply. > They need 'uncorrelated returns' which PE provides, and it might be worth paying extra fees for this. I get they need "uncorrelated investments" as a part of their portfolio management, but that's an institutional investor decision. If their clients demand it, then you make it clear "ok, but you need to realize the fees are ridiculous". Or make alternative investments. All of this is in the control of the institutional investor. But clearly they can make an informed decision if those fees are reasonable? I would disagree a huge institutional investor has a asymmetry of skills and power - CALPERS has a huge team of financial experts with experience across the financial industry. They can hire in house lawyers to go through contracts to their hearts delight - and negotiate (if they can) different terms. And i would argue institutional investors are heavily incentivized to reduce fees because they directly impact the returns they can get, which is linked to compensation. These aren't mom-and-pop organizations buying penny stocks, they are some of the most sophisticated investors out there. They turn down investments all time because they don't make sense. > We need to protect the people who ultimately put the money in the funds, not the chain of asset managers extracting their rents on top of it. But that's the fiduciary duty of the institutional investors. If they can't do the required due diligence, they shouldn't be investing on behalf of the individuals they represent. And as mentioned above, their compensation is directly related to making good returns. > The underlying question is why aren't PE firms competing with each other to provide lower management fees to attract more institutional money. It's because they don't need to. It's a problem as old as the history of PE. The old 2 & 20 has been an issue for a long time. If you have a product with high demand and low supply, you can set the terms. It's a sellers market. There are plenty of other investment vehicles that have onerous fees and lack transparency. Presumably institutional investors decide whether those fees are worth it or not. I have a hard time feeling sorry for highly sophisticated investors complaining about the terms of an investment they had complete free will over investing or not. It's sounds more to me that institutional investors "want their cake and to eat it too". They want access to LBO PE investments, but want better terms that they can't actually get themselves. |
Agreed, but they're facing KKR and Apollo, who are even more sophisticated. PE is a small proportion of CALPERS portfolio. They can't be the top expert everywhere, and they can't be better at PE than PE firms.
> They turn down investments all time because they don't make sense.
But can they turn down a whole asset class?
> If you have a product with high demand and low supply, you can set the terms. It's a sellers market
Maybe we can agree that PE firms are not competing enough on the liabilities side, which makes it difficult for institutional investors to negotiate fees down?
> I have a hard time feeling sorry for highly sophisticated investors complaining about the terms of an investment they had complete free will over investing or not.
To me that sounds like the typical free market fallacy, "no reason to complain or ask for regulation because you can just buy the product elsewhere if you're unhappy". Sure, that works fine when there's enough competition, but I'm not convinced it's the case in PE.