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Private Funds for Ordinary People: Fees, Flows, and Performance

Published online by Cambridge University Press:  11 April 2022

Timothy J. Riddiough  and
Jonathan A. Wiley
Timothy J. Riddiough
Affiliation:
University of Wisconsin–Madison School of Business [email protected]
Jonathan A. Wiley*
Affiliation:
Georgia State University Robinson College of Business
*
[email protected] (corresponding author)
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Abstract

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We study private funds available to retail investors of modest wealth. Our sample covers unlisted real estate investment trusts (REITs) for superior cash flow and fee data. Fee structures are skewed toward performance-insensitive components of the compensation contract, particularly front-end loads. The average unlisted REIT underperforms the listed benchmark by 6.5% per year, 5% of which is attributable to fees. Unlisted REITs underperform institutional-grade private equity real estate funds. Fees paid to investment advisors also explain fundraising success, while past performance does not. The underperformance is consistent with the consequences of managerial conflicts of interest, inadequate governance mechanisms, opaque disclosure, and poor investment advice.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 8 , December 2022 , pp. 3252 - 3280
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Jennifer Conrad (the editor) and Oleg Gredil (the referee) for helpful comments, along with Greg Brown, Andra Ghent, and Jacob Sagi, and participants of 2019 Private Equity Research Symposium and the 2014 Israel Real Estate and Urban Economics Symposium. We thank the Institute for Private Capital (IPC) and the Private Equity Research Consortium (PERC) for generously providing access to the Burgiss data set used in this research.

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