Private-equity fees present hurdles that hobble some fund investors

Costs tied to investing in private equity make it harder for some investors to embrace the asset class, while they drive others to press for better terms from fund managers, according to panelists at an investment conference.

“We want to be very smart about making sure we’re getting good relative value,” said Steven Meier , chief investment officer at the New York City Retirement System, about commitments to asset managers. The $253 billion system manages assets to back promised benefits for about 300,000 police officers, teachers, firefighters and other beneficiaries. The system has $63 billion invested in alternative-asset strategies, including private equity, real estate and infrastructure, Meier said.

“We’re also very proactive in terms of negotiating our fees,” Meier said Tuesday during the SALT investment conference in New York.

Institutional investors increasingly recognize the importance of alternative assets to diversify their holdings and improve returns. While private markets have expanded over the past decade, the number of U.S. public companies has continued to decline.

But the high costs of investing in alternatives can become a stumbling block even for some of the world’s largest investors. In buyout funds, for example, management and performance fees charged to investors eat up 6 percentage points of their returns on average, according to a 2022 study by Ohio State University and Oxford University researchers.

Norges Bank Investment Management, which oversees Norway’s $1.6 trillion sovereign-wealth fund, the world’s largest, sought permission last year to participate in private-equity funds. But the Norwegian government last month denied the request, citing costs and transparency as concerns, according to news reports. It said it could re-evaluate the decision in the future.

“As a fund that’s owned by the Norwegian people, there are considerations about transparency [and] large fees,” Carine Ihenacho , Norges Bank’s chief governance and compliance officer, said during the panel discussion Tuesday.

A number of pensions have sought to reduce private-equity costs by investing alongside fund managers or making direct investments of their own. This approach is particularly popular in Canada, where pension-fund consolidation over the years formed large institutions capable of extracting better terms from private-fund managers and backing businesses directly, according to Canadian pension executives.

For example, Caisse de dépôt et placement du Québec, or CDPQ, manages about $330 billion on behalf of dozens of pension and insurance plans in the province of Québec, said panel participant Yana Kakar , a CDPQ managing director and head of Americas. About 85% to 90% of CDPQ’s capital is invested directly rather than through third-party fund managers, Kakar said.

“What you really want to be able to do is actively manage [assets],” she said. “In infrastructure investing, for example, we will own, we will operate, we will be the designer, the investor, really we will be various end to end.”

High private-equity fees also pose an obstacle for smaller U.S. endowments that don’t have the negotiating power of their larger peers, said Geeta Kapadia , chief investment officer at Fordham University in New York. The school’s endowment manages about $1 billion. She said Fordham often turns to smaller, more flexible fund sponsors.

“We really want to try and make sure that the fees are appropriate for what we’re doing,” Kapadia said. “That’s really why we end up partnering with smaller [private-equity] shops because they’re more willing to have that conversation.”

She said investors should unite to demand more transparency and alignment from private-capital fund managers regarding the fees they charge.

“It’s a very visceral and very personal thing,” she added. “Every dollar that I spend on fees is a dollar that I’m not giving to a student [through] scholarships.”

Write to Luis Garcia at luis.garcia@wsj.com