Private markets – where do pension fees go?

“the lights went on”

According to the FT, CVC partners had a light-bulb moment on their way to their forthcoming flotation.  They realised that what investors want is the  1.5%pa management fee on the $122 bn. CVC has under management (a discount to the 2% which forms part of the infamous 2 and 20 charging structure adopted by the private markets. That 1.5%  makes CVC look like a utility.

“Suddenly there’s a group of people saying I love these management fees, I love the sheer predictable dullness of them,”

If pension funds were to buy shares in CVC, they would pay to get their money back.

Meanwhile , the performance fees (known as the carry) which CVC also charge to investors (including pension funds) would be carved out – under the proposals for CVC’s forthcoming IPO, so they would be maintained by CVC partners.

The big reveal for CVC’s partners was that the performance fees are  (according to the FT) the really lucrative income stream.

CVC plans overhaul to keep lucrative profit stream private after IPO

Why we have price caps

We have a price cap for workplace pensions because the OFT discovered that we are terrible buyers.

The issue is whether we have since 2014 become good enough buyers or at least have people buying on our behalf who can protect us from being exploited by clever money men.

The clever money men have worked out that pension funds will buy shares in CVC which allow CVC’s owners (partners) to keep the performance fees in exchange for selling back to the pension schemes the boring management fees. It sounds like they are rather cleverer than the managers of the pension funds.

What’s more, the private equity managers have worked out that they can make even more money from performance fees by buying out each other’s holdings. Not only does this increase the performance fees (which they get to keep) but it pleases the shareholders who have participated in the IPO.

Private equity groups spend $42bn buying companies from themselves

As the FT puts it

Facing pressure to lift the returns of their public shareholders, listed buyout groups are incentivised to raise more and larger funds — and to buy other asset managers — in order to increase the pools of cash on which they can charge fees.

So the Private Equity managers have worked out they can

  1. Keep the money from buying each other out (keeping the performance fees)
  2. Make money from selling these management fees back to the pension funds that pay them (by selling shares in the income stream via an IPO)
  3. Keep the money from the success of the underlying assets (the productive capital)

From what I can see, the vast majority of the money that is made in the private markets , stays in the hands of those managing private equity.

What is more , they appear to be running rings around the pension funds and the people who regulate the pension funds (the Government – aka the people we pay to protect us).

I am not saying that we don’t need the private capital for productive purposes and I’m not saying that that money shouldn’t originate from our workplace pension savings.

But the more I read about the behavior of firms like CVC, Bridgepoint, Blackstone, KKR, Apollo and Carlyle, the more I realise how vulnerable our money is to the predation of intermediaries who are smarter than we are.

Which is why we need really good governance in pensions. That means going beyond trustees and those who oversee what is going on and putting our trusts in the CIOs of our large pension funds – in the DC workplace that means Nest and L&G and Lifesight and Peoples and Aegon and a few more. In the DB workplace that means LGPS, USS and a handful of other open schemes that still invest in growth assets.

We need to be clear about how we are engaging with these private equity managers and to know where our money goes. That is why we need Chris Sier and others who do not simply accept that 2 and 20 or 1.5 and 10 is ok.  There has to be someone questioning what we as savers and pensioners are getting from our investment not just in the funds of private equity managers but also in the shares they issue (which sell us back our fees).

The private equity people have had a great pandemic, shares in a  group of 11 listed buy-out  firms collectively gained almost $240bn in market value in 2021. These profits do not come from increased productivity alone, they come from the fees we pay for them to manage our money.

We need to have clarity on this, and if we can’t be clear, we need to keep up the defences and maintain the price cap.





About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Private markets – where do pension fees go?

  1. Jnamdoc says:

    LOL. I’m just surprised this realisation too so long. It wad an inevitable consequence of poor regulation (influenced by the industry for the industry, not the savers) creating forced buyers in DC, and forced buyers of gilts in the DB space. If govt can offload gilts at -2% yield, you can see the smart brains convincing their chums or colleagues in the consultant space to buy into 1.5% fixed.

  2. con keating says:

    The chutzpah of the PE industry knows no bounds. I would suggest that trustees of pension funds should consider one simple fact – you can have great selection skills and achieve the top quartile of PE funds but even that does not guarantee you the average return claimed to be achieved by PE funds. Iain Clacher and I examined in some detail many of the claims made by the PE industry and parroted by several government departments in support of the proposed exemption of the charge cap and more widely. Few bear close scrutiny. Our full submission to DWP can be found here:

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