The cost of private equity investing and the impact of dry powder

Private equity (PE) has developed into a wellestablished asset class with strong growth in capital commitments over the last decades. Consequently, fund returns have decreased over time and investors have become more cost conscious. We analyze whether the maturing PE asset class has become less costly over time. Costs are defined as the difference between gross and net returns (return spread) and provide a spread benchmark useful for investors to evaluate a fund's costliness. Althoug return spreads have decreased over time, when controlling for falling gross returns causing lower performancebased fees, the cost of PE investing has increased. The higher costs are related to increased levels of unused capital (dry powder) because of swelling capital flows into the industry. The PE industry is thus a victim of its own success, suggesting that investors in the asset class should consider a more anticyclical investment approach.