building-capital-markets
THEME: CAPITAL MARKETS
11 October 2024 Financial Analysts Journal Volume 80, Issue 4

Accessing Private Markets: What Does It Cost?

  1. Wayne Lim
Applying a novel model to a proprietary dataset, this study estimates that financial intermediation costs impose a meaningful drag on investor returns. Other findings include the impact of economies of scale and non-performance fees.
Read the Complete Article in the Financial Analysts Journal CFA Institute Member Content

Abstract

This paper provides the first empirical analysis of the costs of financial intermediation across private markets and a framework to estimate ex-post costs using observed fund terms. The author accesses a proprietary dataset, develops a novel model, and estimates that it costs investors $0.05 to $0.26 per dollar committed over funds’ lifetimes. The corresponding fee drag on gross-to-net total value to paid-in capital is 0.1x to 0.7x and 5% to 8% in annualized terms. The results demonstrate cost economies of scale in which larger funds cost less in management fees. Finally, the fraction of costs attributable to nonperformance fees is 53% to 75%.

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