$20b cost of hidden private equity fees

The SEC issued a warning in 2014 to the $3.5tr private equity industry to expect increased scrutiny

Private equity managers have extracted at least $20 billion (Dh73.4 billion) in hidden fees from clients over the past two decades, boosting their own profits at the expense of end investors, according to a new study.

The research by Ludovic Phalippou, a finance professor at the University of Oxford’s Business School, is likely to fuel the debate over private equity fees, which are already under examination by US regulators.

The Securities and Exchange Commission issued a warning in 2014 to the $3.5 trillion private equity industry to expect increased scrutiny after finding numerous examples of fees and expenses being charged inappropriately to investors.

Since then, Blackstone, KKR, Fenway Partners, Clean Energy Capital and Lincolnshire Management have all been issued with fines and penalties by the regulator.

Phalippou and two coauthors examined the accounts of 592 companies that were bought by private equity managers between 1981 and 2013. They found that $20 billion was paid to private equity managers by the companies, reducing their value when these businesses were sold or listed on the stock exchange.

“Investors do not negotiate on the hidden fees charged to companies owned by private equity managers. They can negotiate a discount on the management fee but they do not negotiate on the content of the contracts [known as master services agreements] they agree with private equity managers,” said Phalippou.

He added that the study was not able to capture all the different types of hidden fees and expenses, such as private equity managers’ use of private jets.

Private equity managers often pay some of these hidden