As regulators consider opening private markets to a broader investor audience – including retail – the thorny issue of fees has started to resurface, with research suggesting institutions are overpaying for their illiquid allocations.
Research from consultancy bfinance suggests investors fail to check whether managers are applying fee terms correctly which “creates a governance blind spot that can cost millions over time”.
Duncan Higgs, Head of Portfolio Solutions at bfinance, says: “Despite some positive developments in transparency and benchmarking, one crucial aspect of cost management is still commonly overlooked: validation. In practice, many investors rely solely on a manager’s calculations, with in-house reviews typically prioritising overall fee levels over accuracy checks. Our analysis suggests this approach can leave a governance blind spot that may prove costly over time.”
Validation – the process of checking whether agreed terms are being implemented correctly – is far lower priority for investors according to a bfinance poll.
When asked to rank a list of four potential cost concerns in private markets, 90 per cent of LPs placed ‘hidden/opaque costs’ in first or second position, while 61 per cent placed ‘difficulty benchmarking’ in their top two slots.
In contrast, only one in ten prioritised the more validation-focussed subject of ‘lack of compliance with Limited Partner Agreements’ and just over a third picked ‘incorrect waterfall or carried interest calculations’ as their first or second concern.
Further, nearly two thirds of investors do not carry out any validation of GPs’ carried interest/waterfall calculations, which is where a significant proportion of private market costs can originate.
Among the minority of investor survey respondents that do check directly, the most common approach is to rely on internal processes without involving any external parties.
Higgs says: “Part of the challenge is that validation is less tangible than benchmarking. The latter can deliver visible outcomes that feed directly into manager selection or fee negotiations, while the former is about governance assurance: confirming that agreed terms are applied consistently and accurately. Yet it is precisely this assurance that safeguards returns.”
Higgs argues that investors wrongly assume that errors will be rare or minor, particularly when dealing with large, well-established managers.
“Mistakes or misinterpretations have proven more common than investors may assume, and when they do occur, they can be material with overcharges of up to millions of dollars,” he says.
The SEC has brought numerous enforcement actions against private fund advisers for fee and expense-related violations over the last decade. These include allegations of advisers miscalculating management fees by failing to adhere to disclosed methodologies or incorrectly accounting for portfolio impairment.
Actions related to advisers not properly crediting or offsetting management fees as required by fund agreements, as seen in a 2025 case against TZP.
And cases where advisers were found to have overcharged for certain expenses, such as interest on deferred transaction fees.
Higgs says these cases have required reimbursements ranging from several hundred thousand to tens of millions of dollars in individual instances.
The SEC has increased scrutiny of private fund fees and expenses through rule changes and enforcement actions, culminating in the 2023 Private Fund Adviser Rules, which increased disclosure, restricted certain fees and required annual audits.
Yet Higgs says it is important to recognise that “these public cases do not capture the full picture”.
“Regulators are only able to examine a fraction of the private funds in existence, and enforcement activity inevitably reflects a small subset of the market. Independent reviews often uncover similar discrepancies outside the regulatory spotlight, suggesting that such issues are far more widespread than official actions alone might imply.
“In short, transparency may highlight costs, but accuracy and validation are essential to ensure that investors are paying the right ones.”
