Asset owners’ next battle

This blog was originally published on the top1000funds website. Private equity funds have long been characterised by high fees. Even as the number of asset managers (general partners or GPs) offering PE funds increased steadily over the past few decades, competition for the attention of limited partners (LPs) did not lead to an immediate shift in the cost of mandating specialist managers to buy and sell private companies. Recently however, as reported on top1000funds.com in the article Investor pressure on fees, years of pressure from asset owners has led to a seemingly ineluctable trend towards fewer and lower private equity management fees. The fact that increasing competition did not immediately lead to lower costs, when these were high to begin with, is an interesting puzzle. Economists would see a case of strong information asymmetry between buyers and sellers, combined with a case of “type pooling” – in a market where some managers are capable of delivering a high quality service at a fair price (type A) but most are not (type B), both types of manager can tend to “pool” together and offer the same low quality product at a high price. Competition fails. This common phenomenon (think “finding a good plumber”) is the result of information asymmetry: clients cannot tell beforehand which service providers are of type A or type B. Fee levels are only a consequence, or a symptom, of information asymmetry between GPs and LPs. High fees …