The Hidden Tax on Private Equity Investors

作为18年前的一家新鲜的商业学校毕业生，我加入了一家精品私募股权公司。该公司提出了第三个基金，校长致力于尊重的有限合作伙伴清单。我花了我的前六个月，协助尽职调查购买金属纸公司，为啤酒瓶制造闪亮标签。当公司关闭这笔交易时，我惊讶地发现，通过再投资于完善交易的“交易费”，校长已经达到了投资承诺。不是一美元从口袋里出来了。

It was the first time I discovered a hidden tax on private equity investors.

We are living in a golden age for private equity. A decade of strong returns in a benign economic environment and some hocus- pocus around the quality of those returns have made private equity the belle of the ball. Private equity strategies benefited from a forgiving interest rate environment and readily available financing at low cost and with loose covenants. Private equity firms also gave the appearance of a smooth return stream, owing to the infrequent marking of their positions. Quantitative-minded consultants often concluded that the risk-adjusted returns of private equity managers were even better than the absolute returns generated for investors.

In addition to a smooth run of late, private equity is a superior form of capitalism to public equity. Business owners can make long-term capital allocation decisions and implement operational change without short-term pressure on earnings, and allocators who make a single decision for a decade are handcuffed when it comes to reversing that decision at a moment of performance duress.

For the many benefits of private equity investing, the costs of the activity and the current market environment leave a lot to be desired. Established firms are in high demand — and as a result have dictated unfriendly terms for allocators. A typical private equity fund charges a 2 percent management fee and a 20 percent incentive fee. Making matters worse, standard practices evolved: The kind of chicanery that I witnessed just after business school was extended to incorporating deal fees (only some of which offset management fees), along with monitoring fees, consulting fees, transaction fees, and exit fees.

We’ve seen this story play out in the hedge fund industry; it doesn’t end well for investors. During the robust market environment of the 2000s, strong gross returns for hedge funds created insatiable demand. Investment capacity constraints caused competition for talent, and compensation for analysts rose, increasing the “cost of doing business.” As hedge funds captured share from traditional asset classes, the demand for their services appeared price-inelastic; annual management fees crept higher, from 1 percent to 1.5 percent to 2 percent. Allocators were price takers and accepted the deal because they believed the past success would continue indefinitely. They were wrong.

市场环境在2009年后转移;对冲基金的总回报延长了。大多数基金产生了较低的总回报，无法支持高收费负担，并且仍然符合投资者的期望。一些分配者完全离开了空间，其他人成为价格制造者，整个行业将重点转移到费用。当每一分钱都很重要时，分配者削尖他们的铅笔以寻求更好的交易。

私人股本公司现在提取他们的额外的订单und of flesh while the going is good will face serious scrutiny down the road. In a world rushing toward low-cost investing in the public markets, high-cost investing to access similar underlying businesses in the private markets stands out like a sore thumb.

The benign environment that drove strong private equity results is starting to change, and lower returns are likely to follow. Massive capital inflows chasing past success have increased competition for deals and elevated entry prices. A decade ago a middle-market company may have sold for 6x to 8x EBITDA; the same company might sell for twice that multiple today. Interest rate and economic cycles ebb and flow — even when governments interfere — and financial leverage is a killer in a downturn. Private equity firms will continue to benefit from key structural advantages in any environment, but the perfect backdrop will not last.

私募股权经理可能希望考虑对冲基金管理人员了解的经验教训，并在被迫这样做之前积极改善投资者的交易。与长期地平线结婚的公平交易是一场双赢的等待发生。

私募股权周期比对冲基金的循环长得多，那些公司的估计公司可能很长时间。在那之前，它似乎是一个逆分子分配器要谨慎的时间。

As for the firm I joined out of business school, its third fund struggled in the weak economic environment of the early 2000s, the partners split, and it never raised a fourth fund. I didn’t stay around long enough to find out if the investors knew about the hidden expenses, but I can’t imagine it would have helped the manager’s cause.