Fee Levels, Performance and Alignment of Interests in Private Equity

While PE data is subject to time-lag and still US-centric, twenty years of data provide grounds for a thorough analysis of private equity funds (PEF) performances. To do so, we model gross returns for US and EMEA PEFs. We benchmark returns with total market indexes (TMI) using the PME method with the DPI as a regulator of distributions. We find that average US funds perform in line with the calculated benchmarks on a net and gross basis: funds have marginally better IRRs; indexes better multiples. Carried interest has no material impact on the relative performance of funds: when a vintage underperforms the index on a net basis, this holds true on a gross basis. Top quartile funds show an outperformance on a net and gross basis, and timing of cash-flows explains part of this performance. Computing “Bain Capital scenarios” show that the 1%-30% formula is marginally more attractive than a 1.5%-20%, increasing returns by 2.3% over 16 years (0.15% per year). We conclude that more than levels of management fees and carried interest, the level of preferred return rate might reduce the alignment of interests between fund managers and investors. Calculating a spread with PME -DPI index and sharing the resulting alpha might prove more efficient