A recent study highlighted by Financial Times takes a few stabs at some sacred cows of the private equity industry (private equity news). Consider the hallowed alignment of limited partners and general partners. The study, by a former investment banker for Morgan Stanley for the Center for the Study of Financial Innovation, suggest that the two groups are actually at odds in several ways.

"Besides their 2 percent handling fee, private equity managers take 20 percent of the fund's profit above a certain level--say, 8 percent. But their direct stake in the equity is typically very small--perhaps 2 percent. It follows mathematically that they have a much stronger incentive to increase leverage--and risk--than their clients do."

Consider also that by taking companies private, the funds "relieve themselves of the immediate pressure to perform. As investors in the public markets, they are held to quarterly account. But private equity returns are only finally established on the sale of the businesses, which may be years down the road. And if their direct investment performance has been poor, they may feel tempted to rescue the position by gambling on leverage."

The savviest pensions are aware of this. But the reality is that pensions are so starved for returns that alternatives are really the only game for them. They dare not start trying to invest in this manner by themselves. So about the most they can do is bargain for better leverage with funds. Despite all the angst over private equity, Blackstone Group (Blackstone Group news) just raised a $13.5 billion fund, a powerful endorsement.

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