The High Cost Of Investing In Private Equity For HNW

I recently looked at a few of the largest US banks’ private equity solutions for HNW. In spite of all the perspective of having worked with investments for a while, I was surprised by the extra level of fees billed HNW customers.

Start with the alternative investment . Certainly the private equity companies have pricing power in this current seller’s market–in my current Forbes column”Not Enough Private Equity To Go Around”, I shared that Preqin estimated that there was a record $2 trillion in”dry powder”, or unspent money, privately funds globally, with more than $1.2 trillion of the total $2 trillion being allowed for equity.

And in the private equity company level, costs and fees are opaque. In addition to the standard 2% control and 20 percent operation charges, private equity firms normally also charge shareholders for items such as”tracking fees”, research fees and related travel, and costs associated with representation on operating company boards.

The banks create Private Equity Fund of Funds, in creating equity options for their HNW customers. A normal HNW solution may include ten to twelve private equity capital, and in many cases banks have managed to successfully decrease the underlying private equity firm performance charges by the addition of a hurdle rate–hence the inherent performance fees come in more like 15-20 percent more than a 6-8 percent barrier.

After procuring the private equity to the HNW equity solution, add

A Two percentage load fee unless $5million is invested
An annual investment fee of 75 basis points
An Yearly administrative fee of 15 basis points

In looking at among the bank’s returns for its most recent HNW onshore set in this instance the IRR far to investors is coming in at 9-10%. When questioning the return because sounding low for this time period, the bank

representative responded that these were”great returns” for such a diversified approach. One wonders when the construction of the approach may be over-diversified, and possibly restricting the upside yields –.