When executives at TorreyCove Capital Partners LLC looked at the academic research on the relationship between fees and returns in private equity, they found little of it. And what was there came to opposite conclusions.
So, they looked at their own data — 200 funds in which their clients are invested. What they found is “there doesn't seem to be a bankable relationship,” said Thomas Bernhardt, senior vice president, research at the San Diego-based alternative investment consulting firm.
“I think the main point is, if you are an investor and you are just looking at fees, probably you are missing the point with private equity,” Mr. Bernhardt said. “The real issue is that you have to pick the right manager.”
That doesn't mean there was no relationship at all. TorreyCove's study found a “slight negative correlation” between management fees and performance, but Mr. Bernhardt said that most funds, including those with higher fees, performed well enough to cover the higher fees.
When TorreyCove's data are grouped by returns, the worst-returning group, with an average performance of -8.64% as of June 30 charged higher management fees — 1.76% on average; the middle-performing group had an average return of 9.33% with an average management fee of 1.723%; and the highest-performing group — with an average return of 25.7% — had an average management fee of 1.677%.
This article originally appeared in the January 21, 2013 print issue as, "TorreyCove explores private equity fee, return correlation".