Money for Nothing and Fees for Free

Great Reuters article about an incredibly common practice in the world of PE (and VC) – funds sitting on assets for the sole purpose of collecting fees.

Generally these funds have a 5 year period to make investments, after that period comes to pass a fund generally switches into “harvesting” mode where the GPs work to realize (sell) the assets and return money to LPs (investors).  But because of the way GPs are compensated they actually have the perverse incentive NOT to return your money or realize many of the investments.

You see if the fund has a 10 year life and the GP is paid 2% per year on the dollar value of the investments then why give that up?  Sure it will piss off the LPs but the GPs will likely be on to their next fund before that happens.  Money for nothing and fees for free.

The article is more enjoyable if read while listening to this.

Reuters: More than $100 billion trapped in ‘zombie funds:’ industry data

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