The people handing out billions rarely get paid for picking winners
Investment managers pitch profits, but the gatekeepers rarely share in them.
Invest Like the Best with Patrick O'Shaughnessy · How to Raise a Few Billion DollarsThe people who decide where billions in pension and endowment money go usually do not earn more when they pick a winner. That is the dirty secret of the business, according to fundraising expert Wolf, who advises investment firms on raising money.
The setup sounds backward. So-called limited partners hand cash to so-called general partners, the managers who invest it. You would expect the limited partners to get a cut of the profits. Very few do, Wolf says. A few earn bonuses tied to a measure called internal rate of return, or IRR, a yearly growth rate.
That link is weak. In private investments, it can take 10 years to know if a bet was good, and managers have tools to make that yearly rate look better than it is. So many gatekeepers, Wolf says, simply see no lift in their own pay when their managers score big. There is no greed to appeal to.
Questions people ask
If they don't get a cut of the profits, how do these investors get paid?
They are typically salaried staff at pensions, endowments, foundations, and similar institutions. Any bonus is usually tied to salary bands, the health of the overall fund, and doing the job cleanly, not to getting a share of one winning investment.
What is IRR, and why doesn't it fix the mismatch?
IRR stands for internal rate of return, an annualized growth rate for an investment. It can be flattered by timing tricks, such as calling money later, returning it early, or using borrowed money, so a high IRR does not always mean more cash in the end.
If returns aren't the motive, what persuades them instead?
Career safety, trust, and looking sensible to their committee. A fund choice that is easy to defend, transparent about fees, and steady in behavior can matter more to them than a chance at a slightly higher return.