Let’s focus on the different components of private funds, highlighting what we believe are the industry’s best practices.

In the current low-return environment, there is a compelling case for owning tax-efficient assets with a demonstrated return premium. In addition, many private fund returns, particularly from private equity and real estate, are relatively tax-efficient, as most are treated as long-term capital gains. For top quartile funds, the premium was even higher, around 500 basis points annually. The private equity market over the past three decades outperformed the S&P 500 Index net of fees by at least 300 basis points annually over 10-, 15-, 20-, and 25-year periods, as illustrated by the chart on page 11. So, what’s the attraction? Investors who can tolerate the illiquidity and the relatively high fees can be rewarded with relatively high net returns. This is followed by a harvesting period of two to six years, when the fund liquidates its investments and returns the proceeds to the limited partners. They typically have an investment period of between two to six years, during which time the fund makes investments and draws down capital. Private funds can include any illiquid limited partnership structure, such as private equity, real estate, and/or credit. For many qualified investors, however, private funds can be worth the trouble.

So too can the investment time frame assets can be tied up for seven years or more.

For some prospective investors, the management fees and carried interest charged by the general partnerships that manage these funds can be a turnoff. Three words are commonly associated with fees related to private funds: onerous, opaque, and complicated.

Contra returns best partner