Private equity and private real estate would be far smaller if fiduciary obligations were enforced as required. Most capital would likely move into index ETFs or other public equivalents. Research focused on private credit finds returns that may not justify fee loads after considering leverage and risk. Fee structures such as 2% management fees plus 20% carried interest can create substantial drag compared with public index funds with very low expense ratios. Retail investors continue to be marketed semi-liquid private funds despite the cost and risk tradeoffs. The core concern is that fees paid from private funds can materially affect net outcomes relative to public benchmarks.
"“If [fiduciary obligation] was enforced like it should be enforced, there would be very little private equity and private real estate outstanding. Most of the money would've gone to some kind of index ETF or some public equivalent,” Hook said on episode 409."
"“Hook's research has focused on private credit, where he found returns that do not justify the fee load once you account for leverage and risk. When Cliffwater, a major private credit consultant, pushed back with a critique focused on business development companies, Hook said BDCs are ‘kind of similar to private credit funds’ but with ‘significant differences.’”"
"“A typical private equity fund runs a 2% management fee plus 20% carried interest. Compare that to Vanguard S&P 500 ETF (NYSEARCA:VOO | VOO Price Prediction), which carries a net expense ratio of 0.03% per its most recent fact sheet.”"
"“Why Retail Keeps Getting Pitched Anyway. Host Benjamin Felix flagged the structural issue: ‘the amount that has been paid from private funds’”"
Read at 24/7 Wall St.
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