Private equity funds have failed to outperform equity indices over a 10-year period, but still charged pension funds and wealthy investors billions of dollars in performance fees, according to analysis by the University of Oxford.

The analysis indicates that large U.S. public pension plans earned about $1.50 (net of fees) for every $1 invested in private equity funds between 2006 and 2015. This translates into annualized returns of about 11%, little different from the U.S. stock market over the same period.

The performance of PE funds, net of fees, matched that of public equity markets since 2006, yet “the estimated total performance-related fees collected by PE funds is estimated to be $230 billion, most of which goes to a relatively small number of individuals,” Ludovic Phalippou, head of the the finance, accounting and management economics group at Oxford, said in the study released last week.

The report also said the number of private equity executives with personal fortunes of more than $2 billion has risen from three in 2005 to 22 for 10-year returns that could have been matched by an inexpensive index fund costing just a few basis points.

“This wealth transfer from several hundred million pension scheme members to a few thousand people working in private equity might be one of the largest in the history of modern finance,” said Phalippou, a professor of finance at Oxford's Saïd Business School.

The biggest winners have been the founders of Blackstone, Apollo, KKR and Carlyle—the four largest private equity managers. Stephen Schwarzman, Blackstone co-founder, is the world’s 29th richest billionaire with a personal fortune of $17.7 billion, according to the annual Forbes list. Leon Black’s $7.7 billion fortune ranks the Apollo founder at 63rd, while George Roberts ($6.1 billion) and Henry Kravis ($6 billion) come in at 108th and 112th respectively. David Rubenstein, Carlyle co-founder, is in 275th place with an estimated wealth of $3.1 billion.

Private equity contracts are complex and opaque with little public information disclosed about fund performance. But claims that illiquid private equity strategies deliver markedly superior performance to public markets have attracted huge inflows from institutional investors, including pension funds, insurers, sovereign wealth funds, endowments and family offices.

Phalippou said successful lobbying, not actual PE performance, is to blame for what some might see as a pricey con. “Why are trustees, investment teams, external managers, consultants and others not seeing through this? Maybe because their livelihood depends on them not seeing it. Net-of-fee performance of PE funds being superior to that of public equity is the sine qua non condition for continued employment of at least 100,000 people. The importance of this condition might explain why the mantra of ‘PE outperforms’ has for many people, who work in and around PE, become a quasi-religious article of faith. Merely to question it is considered heresy: Either you believe and you are one of us, or you question the existence of outperformance and you are an enemy. The level of emotion generated by the mere questioning of PE outperformance is, in my experience, second to none in the financial industry,” he added.

Many individuals who have directed and controlled PE investments want to avoid the embarrassment of admitting they’ve been fooled, Phalippou said. “Think of a pension fund board admitting paying billions of [excess fees] in order to achieve the same returns as public equity markets. Board members and trustees typically have what economists would call poor incentives, in that they face only a potential downside (mostly reputational), with no upside. This encourages herding behaviour: It is easier to follow the crowd and hard to be a contrarian. Finally, there is self-selection. As data is incomplete, there is room for interpretation. Those skeptical about PE will not work in that industry whereas those who do, will,” he said.

The findings were released just after the U.S. Department of Labor approved a rule that allows 401(k) plans to offer private equity funds to rank-and-file investors—a move criticized by some who argue savers are better off investing in a low-cost index mutual fund or ETF that tracks the S&P 500. The ruling, sought aggressively by lobbyists for the private equity industry, will allow PE funds to market to the trillion-dollar private qualified retirement plan market for the first time ever.

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