I would like to say I’ve read B-finance’s Investment Fees Survey published this month, but I have only read the reviews published by the financial press which , from their similarities, suggest they are rehearsals of a press release. The latest published version of this biennial fee survey is dated October 2019. When the 2021 version hits the web, I will share it.

But the message from the press release is loud and clear

In this article, I argue that we are nowhere near understanding what we are paying for these funds – even if we know what we are likely to get from them (see my recent blog).

Frustrating as it is , not to be able to read the source material, it’s clear from Jonathan’s Stapleton’s Professional Pension report, that at the wholesale level, the overt cost of ESG management is falling and falling because ESG is now a mainstream activity and its costs distributed over a huge pool of assets.

And if the wholesale purchasers are finding an easing in pricing, we could expect to see this passed on to the workplace pension funds in improved value for money. There is an “if” here, because it’s far from clear that what we are seeing is an improvement in value for money.

Much of the asset management is not around listed stocks but in private markets where information is harder to find and the participation in the management of the assets, a lot more hands on. We would expect to pay a premium for the active management of private assets but it will come as a shock to many retail investors just what “fees fall significantly” actually means.

Take this statement

Importantly, Bfinance said performance fees and hurdle rates have also fallen. While many managers are at the 20% mark on carry, it said it does see an increasing proportion willing to price between 10% and 15%. In addition, it noted the median hurdle rate has declined to 6% from 7%.

This means that many private equity and hedge fund managers are taking £1 in every £5 earned by the fund , though this could be falling to 75p or even 50p. In percentage terms, fees falling from 20% to 10% of fund returns still means margins that will be unacceptable to many purchasing on behalf of ordinary savers.

The decline in fees has, however, been accompanied by a fall in target returns, as well as a rise in the proportion of longer-term vehicles versus ten-year private equity-type fund models. The median net IRR being targeted by funds raising capital in 2021 was 8%, down from 9% five years before.

If funds are not being so ambitious, then you might expect performance fees to be falling, but all this seems meaningless, unless we can see worked examples. What has been achieved and what money has been taken for what value created?

Some of the iniquities of private market pricing are hinted at

 lending fees [are] now almost universally charged on invested capital only rather than on both invested and committed capital

Which suggests that it was until recently to charge a lending fee on money not yet lent!

The impression the reader gets is that this is definitely a “no go” area unless you have an expert’s tin hat and a thorough “health and safety briefing” about the dangers of low-flying jargon.

recent search activity in this space (Q4 2021) suggested there may be an on-paper premium on the pricing of article nine strategies, with a slightly higher median and a significantly higher upper quartile fee than it observed in article eight strategies.

Compare this with the clarity of the FCA’s DP21/4  to see that there is a gulf between the language of the institutional investor and that of the Regulator. Take for instance, this statement from the FCA about the “Sustainable Disclosure Requirements”

We welcome the growing market and innovation in these products, which represents an important mechanism for allocating capital to sustainable economic activities.
However, there is also a risk of harm if the market responds to rising demand without adequate regulatory checks and balances and delivers poor outcomes to consumers.

It is possible for consumers to understand the value of what their funds are promising them through the clear labelling suggested by the FCA.

But to understand whether they are actually getting that value, the FCA are suggesting that there may need to be independent verification. This will be particularly important where funds are promoting themselves as making a positive social impact. Here it seems it is common practice for managers to reward themselves not just for managing the money but for making the money matter. The B-Finance paper tells us

For some managers, the performance fee relates to both financial and impact objectives

The charging of fees on something as subjective as “impact”, is worrying – just what are the triggers, what the KPIs and what is being taken/

If we are to be investing up to 20% of our workplace pension pots into private markets, we will need to have confidence that the people purchasing asset management know what they are paying and know what they are paying for.

While I am sure that – when it eventually is made public – the B-Finance report will help the institutional investor, it shows how great the gulf is between the understanding of intermediaries (them) and those they serve (us). I would suggest that this gulf will need to close if we are to have long term confidence that our money really is making a difference.