This article describes a study that analyzed the private equity performance and costs of large pension funds. Using data from the CEM Benchmarking Inc. (CEM) database, we establish that implementation style affects net performance: internal management outperforms external management, and external management outperforms funds of funds (FOF). Since the difference in net performance is due largely to cost, we examine the cost differential of various implementation styles as well as some of the challenges in understanding the true costs of investing in the private equity asset class.

The raw material for this study came from the databases of CEM Benchmarking Inc.1 These databases contain performance and cost information on more than 1,000 pension and sovereign wealth funds from around the globe. Assets under management as of December 31, 2012, ranged from US$0.4 billion to US$644.8 billion, with an average size of US$18.3 billion and aggregate assets of US$6.8 trillion. The actual allocation per fund to private equity in 2012 ranged from 0.0% to 25.5%, with an average of 4.1% and a median of 2.9%.