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.
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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%.