PEI’s Data Dive: How PE is responding to growing cost scrutiny

0:02Welcome to the latest episode of PEI's new podcast series Data Dive, where we unpack the numbers shaping private equity and explain what they actually mean. In this series, we'll dig into PEI's proprietary data, surveys and rankings, as well as recent market data sets to understand what investors and fund managers are thinking, where capital is moving and how the asset class is changing. Today's episode is sponsored by Witham and Troutman Pepperlock and focuses on PEI Group title Private Fund CFO's Fees and Expenses Survey 2026, which tracks how fund managers handle fees, expenses and disclosure based on responses from 132 firms.

0:39We'll examine how broken deal fees are impacting alignment among key stakeholders, how co-investments are reshaping expectations, and how LPs are facing an expanding set of costs. I'm joined by Colleen Fay, partner and practice leader at Witham, Theodore Edwards, partner at Troutman Pepper Lock, and Bill Myers, Washington correspondent for Private Fund CFO. Together, we'll analyze the key findings from this year's survey and what they reveal about where the industry stands today. I'm Evie Russman, and this is PI Spotlight. Thank you for being here today. Colleen and Ted, just to kick things off, your firms have obviously been partnering with private funds, CFOs, fees and expenses survey for over a decade.

1:17So what would you say were the biggest themes that stood out from this year's survey? So I think one of the quotes in the survey responses that I liked most was disclose what you do and do what you disclose. So I think the continued focus on regulatory alignment and making sure your actual practices align with the disclosures that you're making and the agreements was a big theme in this year's responses. So, you know, even if ultimately you decide on treatment that may not be 100 percent LP favorable, as long as there's transparency and rationale behind that decision seem to be an overarching theme.

1:51I absolutely agree with that. And that sort of aligns with the June 2026 risk alert that came out on economic conflicts of interest and disclosures, which, you know, to my mind was really sort of a greatest hits of economic disclosure practices, failures, you know, fee calculations, undisclosed fees. Those are sort of the low hanging fruit topics that every manager should be looking at and reviewing their disclosures to ensure they're consistent with their practices. Great. The first topic I want to get into is increased regulatory scrutiny. I know, Colleen, you briefly mentioned it in the intro.

2:32But just to throw some stats out there, the fees and expenses survey showed that 90 % of respondents said the SEC asked about fees and expenses during their most recent examination, as well as that manager seemed to be placing a greater emphasis on ensuring disclosures match actual allocation practices. So my first question is for you, Bill. From an editorial perspective, what does this tell us about today's regulatory environment and how does it chime with what you're reporting on the topic? In some ways, it underlines the reporting that I've done over the last seven years. In other ways, it sort of hangs neon lights and sort of blasts it through.

3:07It's like getting hit in the face with a macro. You know, just as a sidebar, do you know how hard you have to work to make me feel like I'm being too subtle? When you see 90 percent tell you that fees and expenses are on the SEC exam requests, it's telling you the regulators see good fees and expense governance as table stakes. We've known no later than 2020, under the last Trump administration, when the SEC issued its first ever risk alert for private funds industry by itself, that fees and expenses are sort of the bare minimum. And what we've seen, even as Washington, you'll hear old heads say that the SEC has gotten more political over the last two decades.

3:46And what they mean is that it's much easier to tell when a Republican is in charge versus when a Democrat is in charge because they tend to go in polarized directions. What the fees and expense findings show us is that even as the two parties argue over the ceilings that they want to put on regulation, the floor keeps rising. Ted, from your perspective, what do the survey findings reflect on what the SEC is now signaling in its examination processes and what changes are firms making in response to increased regulatory attention? I think the phrase table stakes is very apt here. 90 % of respondents said their most recent SEC exam included questions on fees and expenses.

4:27That is sort of the baseline for managers to participate in good faith. The relationship between a management company and their client funds is a fiduciary relationship, and conflicts of interest and fees and expenses go to the heart of that fiduciary relationship. So how they're charging fees, how they are being calculated, how questions that don't have clear answers are being resolved, whether they're being resolved in favor of the client or the management company. Those are sort of key questions in the fiduciary context. And the fact that only 8 % of exams are resulting in deficiency on these topics does show that managers are taking these lessons to heart, are trying to operate in good faith and operate in a manner consistent with their fiduciary duties.

5:13Great. Thanks, Ted. Moving on from regulation, I think it makes sense to talk about fee structures. Just to give you some stats again from the survey, the market continues to move towards 100 % offsets against management fees, with LP scrutiny of fee offsets continuing to remain high. That brings me to you, Colleen. What do you think is driving this move towards full fee offsets? And how are firms balancing maybe commercial considerations with investor expectations? Yeah. So, I mean, I think along the lines of regulatory and kind of reducing some of that gray area aligned here as well, I think removing the potential perceived conflicts when there's multiple layers of compensation with transaction fees, monitoring and advisory fees that the GPs and technically the management company may be receiving is one of the reasons for a movement to full fee offsets that, you know, we're seeing a lot of LPs not just ask for anymore, but expect as part of the discussion.

6:10The fundraising market is obviously tough. So I think sponsors are increasingly willing to budge on that item, assuming that their investors are just going to expect it. But to your point, I mean, there are commercial considerations there in that managers still need to be able to operate their firm and run their platform. So they may need some of those resources. So I think it's a discussion that continues to evolve. You know, maybe newer funds may have a different structure as far as how much the fee offset is or if down the road, once they hit a certain hurdle, it shifts to being fully offset.

6:46So I think we'll continue to see discussions around that area. And Ted and Bill, do you have anything to add about why you think fee offsets are maybe receiving more attention? I think it goes back to the conflict of interest or perceived conflict of interest between a manager, the limited partners, and their relationship to the fund assets. You know, it used to be that sort of the three legs of the compensation stool where the management fee carried interest and these sort of related fees. But increasingly, the related fees are being offset and 100 % fee offsets are now sort of becoming much more commonplace.

7:25I think it's largely a question of scale that Colleen alluded to. So if you have a new manager, an emerging manager, and they need to keep the lights on, that 2 % management fee might not be enough money to sort of pay personnel, pay rent, pay utilities, and things of that nature. So I think scale is a question in this discussion about the degree of offsets and which fees are offset and which are not. Now, my impression is, and I'll defer to Ted and Colleen on this, but my impression is that these negotiations have gotten a little thornier because of the rough exit environment, because the recent vintages, especially at the top level managers, the big asset managers are struggling relative to the old S &P index.

8:07So it's given the LPs a lot more sort of power and leverage to make the kinds of demands. And, you know, by the way, Ted and I took a victory lap on the 8 % deficiency rate in your sample, E.B. But the fact is, LPs for years have been asking to see deficiencies or to be briefed about it. So even if your case doesn't turn into an enforcement, there's reputational risk behind it. From the regulatory side, and I'm sorry, Ted and I keep throwing risk alerts at the audience. But in 2022, under then the Democrats, there was a follow-up risk alert on private funds. And among the things regulators flagged was that GPs weren't following the agreements they had set in the LPAs or in their side letters, in their marketing materials.

8:49And the thing to keep in mind about, especially fees and expenses, is that if there's mistakes in there, good faith or not, you're giving regulators their hooks because that's a very plausible and clear theory of damage, right? The fees are higher than they should be. And therefore, investors have some of these axes getting gored, basically. And once the regulators get in there, Ted and Colleen have talked about it, it can spin off into a number of different potential violations or enforcement actions, not just the anti-fraud statutes, but conflicts of interest, failure to disclose, fiduciary and failures.

9:24So it opens up a whole universe if there's discrepancies between what you said you were going to do and what you're actually doing. I think one other item, too, just to further complicate the conversation, at least with the management fee offset, is for the certain investors, just from a tax perspective, they may or may not want them. So I think as far as coming to a place where there's a one size fits all answer to how they're treated, I don't think we're going to get there either. So that's why I think like there's still going to be different scenarios for different investors, different fund managers, depending on where they are and what they're amenable to receiving as well.

10:01That's a great point. Frequent topic of side letter negotiations and individual discussions with LPs. Really glad that Colleen brought that up because among the things that we understand that regulators have asked about, are asking about, it's not just management fees offset. It's the entire fees of the post-commitment period. And one of the problems that GPs are running into is things like dividend recapitalizations are treated differently for tax purposes. And it's given examiners an entree. So wait, you're classifying it one way for tax. Why aren't you doing it this way for your funds? And again, it's not leading to enforcements necessarily.

10:38It may not even be leading to deficiencies. But that's time and energy you've got to spend explaining this. Yeah, I think it's all documentation, right? It goes back to just making sure it's disclosed somewhere so that you can point to it, even if it wasn't favorable in one direction or the other, just that they have something as support for it. I was just going to tack on to that documentation point. It's important that the documentation be contemporaneous with the decision made at the management company and not sort of recreated retroactively. I think that the contemporaneous documentation will do a lot to support your narrative in front of any regulator or LP.

11:14Sure. You've kind of touched on this already, obviously moving on to documentation. And the fees and expenses survey showed that almost two thirds of firms are now consulting outside counsel when allocation questions are not addressed in fund documentation, as well as managers increasingly favoring conservative interpretations. Colleen, if you want to take this next question, would you say firms are reviewing older LPAs and policies more frequently at the moment? Yeah, I mean, I think a lot of LPAs were drafted before some of the things we're seeing evolve now, such as continuation vehicles and co-investment structures.

11:50So they've become more of the norm. So going back to the LPAs and making sure they contemplate some of the discussion items that we're talking about here, you know, and the goal is to find areas in that agreement where the language maybe was technically correct at the time, but maybe operationally unclear considering some of these new structures that we're seeing. And I think that comes up a little more often than you would think. So I think people are trying to be proactive in line with what we're seeing in the survey, right? That they're asking questions about these things. So making sure that you're prepared if and when asked about it.

12:22I think the trend that we're seeing is that fee disclosure is getting much more granular. If you look at the definition of fund expenses or partnership expenses in an LPA, it can run three, four, five, six pages. And that has been a trend at least for the past five to seven years. And I don't see that trend reversing or slowing down anytime soon. It's just a menu of expenses and managers are putting every expense under the sun in there to make sure that they're covered in the event that that expense arises in their business.

12:55So far, one message has come through consistently. Managing fees and expenses is no longer simply about getting the numbers right. As regulatory expectations evolve and investors demand greater transparency, firms are placing much more emphasis on governance, documentation and demonstrating the rationale behind their decisions. In many cases, it's not just the outcome that matters anymore, but whether managers can clearly evidence how they reached it. That shift is changing the way firms approach everything from fund documentation to day-to-day operational processes. Let's explore this further.

13:31Colleen, I know you mentioned briefly about continuation vehicles earlier. So I'd just like to explore that a little bit more. Most LPAs still don't specify who pays costs relating to continuation vehicles transactions, as well as that most firms decide cost allocation at the time of transaction and seek LP approval. What would you say, Colleen, firms are doing to improve transparency around continuation vehicle costs? And how do you think LP expectations are influencing these decisions? Yeah, so I think to the earlier point, people are going back and trying to adjust documentation proactively for these types of structures, because right now they're trying to resolve ambiguity on that on the fly.

14:12I think earlier discussions with LPACs, more detailed transaction disclosures, greater documentation of their allocation methodology, and then seeking explicit LP approval where necessary is what's happening right now. Just because the LPs want visibility into all of those costs, like advisor fees, fairness opinions, failed deal expenses. I thought it was interesting from the survey, though, that it is still a wide range of how they're being handled currently. So there's not any one particular direction, it seemed, that people are leaning when they're treating these various items. And, you know, the LPs may not always agree on the outcome, but they expect to understand the rationale behind it.

14:54Yeah, I think the genesis for the continuation transaction is an important driver of how fees and expenses are allocated. And I think that's there's a point to that in the survey. The LPAC is sort of clamoring for liquidity, the funds at the end of its life. it might make more sense to put more fees allocated to the funds bucket. But if the GP sees potential in the asset and wants to develop it further, it might make more sense to allocate more fees and expenses to the sponsor. The other thing that's an important point to consider here is the role of a lead investor, if there is any, and their ability to leverage their negotiating power as to how fees are allocated in the continuation transaction.

15:38Why do you think continuation vehicles have become such an important issue for CFOs? I think continuation vehicles 10 years ago were very rare. They were the exception and they've increasingly become a viable exit strategy among IPO or strategic acquisition or sale to another financial sponsor. The continuation exit is now among that exit set. So I think the fact that it's becoming more accepted and more popular is making CFOs focus on it not as an extraordinary one-off that they can sort of get used to, but as something they need to have developed policies and protocols around. As of a couple of years ago, it was the most popular form of GP-led secondary as a continuation vehicle, wasn't it?

16:24So it's just part of the business, isn't it? And if that's the case, I think the feeling of the LPs are at a minimum, and maybe the regulators, if you're not careful, you have to be prepared for this. Like, don't screen this on us. Like, let's talk about this now so that we don't have to have conflict later. You know, in LPAs that we're seeing now, we're seeing baked in continuation provisions, you know, as a whole section of the LPA. And oftentimes in the first initial drafts, they are very favorable to the sponsor. So those negotiations around what those provisions allow, the scope of those provisions, that's a heavily negotiated topic these days and something that a lot of LPs are very focused on.

17:05Maybe curious, Ted, is that around the incentive piece of it? incentive piece, oftentimes it will provide for how the carry is crystallized and how much of the carry is rolled over. But also it allows for non-pro rata distributions and things like that, all this sort of mechanical minutiae that's involved in a continuation transaction. And that's where I'd say we're seeing the most discussion to the earlier points of where DLPs did not contemplate this and they're in a transaction and they're having to go back and amend these things right now and, you know, under time sensitive turnaround to have everyone agree to what's in there and then obviously be able to effectuate the transaction depending on what the underlying asset is and what may be going on with that.

17:49Sure. Just moving on to new sources of capital. The survey also showed that 73 % of respondents have no plans to accept retail or semi-retail capital, whereas 27 % either already accept retail capital or plan to in the near future. Retail participation continues to sort of dominate industry conversations, yet most firms are remaining cautious. Why do you think that is? Bill, you want to take that one first? I think, first of all, the data bears out what we're hearing, especially among my readers. The small, midsize emerging managers aren't really interested in retail. Sorry to borrow the Washington cliche, right?

18:29The Jews saying, or at the squeeze, everybody in the industry is going to be affected by this retail influx, right? Because we've already seen it, right? With the private credit troubles in recent months, it didn't radically, but you could see a change in the SEC's posture as those headlines started going out about redemptions. And this coming flood of retail advisors, and I expect most of them will go to the larger funds, those that already have big channels of high net worth investments, they seem better poised to take this on. But the influx, it will shed light on fees and expenses, on transparency, on valuations, which is the mother of all private equity, fee and expense questions.

19:10Colleen, I might come to you for this next question. What operational or regulatory challenges come with accepting retail capital? I think, you know, some of the things that were touched on, but in addition to that is more frequent reporting, enhanced investor communications. some of the things we see, greater servicing requirements, and additional compliance infrastructure. So I think to the earlier point, while it sounds good to have more investors flooding the market and more capital for those that are out fundraising, the reason the answers in the survey lean a little more towards maybe they're not accepting it yet is because there's an infrastructure that's needed to be operationally ready to accept that capital just because of all of those things and different liquidity expectations that come along with retail investors.

19:55I do think that regulators look at managers that accept retail capital with a little more scrutiny. It's not to say they apply different standards to different managers, but if your investors are professional shops with investment professionals that are performing due diligence, there's sort of an implicit understanding that they can look out for themselves to some degree. I don't think that's there for retail investors. So regulators will be looking with a magnifying glass at your policies and procedures and your practices when you have retail in your products. Sure. There's been a bit of talk there about how the industry is maybe not ready to accept retail to that level.

20:38And obviously regulators are looking at retail with a bit more scrutiny. Do you expect that to shift over the next few years or do you sort of see that kind of continuing the same way? I think there was a recent position change from the Department of Labor that would allow some retail access to alts through 401k plans and other retirement plans. But that's sort of indicative of what we've been seeing. A lot of the talk about retail access to alts is really retail alts in a wrapper that's accessible to retail. There are difficult securities laws issues to confront if you were to put retail directly into a qualified purchaser fund, for example, that just it just wouldn't work.

21:20So I think there will always be some level of professional intermediation. The question is what that looks like, where the fees are being taken, are there multiple layers of fees? And are all those arrangements appropriately and adequately disclosed? The comment period on their Department of Labor proposal just closed. And labor officials have promised that they'll do their analysis through August. So, you know, sometime by early next year, say January or March, it's reasonable to expect we'll get some kind of final rule on retail investment and private pension funds. What the regulators have made clear is if they're going to offer private funds to ordinary investors, they're going to wrap it under a fiduciary's care.

22:01So whatever comes out with the Department of Labor or with the SEC, it's still going to be on any private fund that's thinking about retail channels. They've got to make the case to these pension fiduciaries, right? And it's similar, but it's not the same as negotiating with LPs whom you've known for 20 years. And if there's any sort of fog or unclarity, my suspicion, because the rule proposal that labor is talking about is to provide safe harbor from litigation. As you know, litigation is one of the drivers of the American economy. The litigation protections are going to be put in place so that a pension fiduciary may not have to worry about being second guess, they'll still have to worry about being second guess.

22:39There's still actionable problems here. And if you can't make it clear right away and straight to a pension fiduciary, you're not getting these clients. One point that I think we've all been circling, but I'd like to just put a fine point on it is that, you know, their retail investors need liquidity at unexpected points. There may be a medical emergency or a job loss, and they just need liquidity. And that's not the case with your institutional investors. So that's sort of a structural challenge for retail access to some of these illiquid investment products.

23:14Let's pause here. We've heard how the role of the CFO continues to evolve, whether it's navigating increasingly complex fund structures, preparing for greater regulatory scrutiny, or responding to changing investor expectations. The job has become far more strategic than simply overseeing financial reporting. Looking ahead, another question is beginning to emerge. How much of that growing complexity can technology help solve? And where will human judgment remain essential? That brings us to one of the industry's biggest talking points, artificial intelligence. Now, back to the discussion.

23:51Even though the survey didn't specifically touch on AI, it feels like we should talk about it within a fees and expenses situation. The stat from the survey is only 5 % of firms reported indirect reductions in management fees as a result of automation, with many firms yet to adopt AI in a meaningful way. It seems that AI is one of the biggest talking points in the industry at the moment. So Colleen and Ted, I'm just going to throw this question out to both of you. It kind of comes in two parts. But where do you think firms are currently seeing the greatest benefits of AI and what needs to happen before automation has a measurable impact on fund operations and costs?

24:29So I was actually surprised that there was less impact this bar, just because to your point, the conversation around AI is so robust right now. And the speed at which it is evolving is so fast that I think, not that we're making predictions for next year, but I think this will be a big piece of this type of survey for next year's time period. But as far as, you know, where do we see the greatest benefit right now? I think it's in document review, investor reporting, data extraction, and compliance monitoring. But I think the conversation will continue to evolve as far as this was talking about a reduction in management fee due to the use of AI.

25:08I don't know that you're going to report on that you're going to see large reductions in management fee even next year as more firms implement AI in their platforms because there's savings are being reinvested into how they're using the tools that they're building with the AI platform. So I don't know that it's going to have a meaningful reduction of fees because there's a value for what they're able to do now that some of these things have been automated or taken off their plates, right? That is what the investors are paying the management fee for is the value being brought to the investment decisions being made.

25:45So I think we'll just continue to see that more back and forth there. And I'd be curious on whether we eventually see a significant reduction in the fees because of that. I think with AI, there's a question of how it's being used at a management company, whether it's being used for middle office functions or whether it's being used for investment or client facing functions. And I think those two buckets present different risk profiles that have to be addressed in different manners. In addition, I think AI is leading to a proliferation of books and records and potential material that is subject to audit and examination.

26:23So while it is efficient and leads to efficiencies in sort of production of work product, there may be inefficiencies on the back end in terms of exam, audit, and review of those materials. Don't you think that part of it is it depends on whether the fund managers view AI as an augmenter or an automator, right? Because especially when we're talking about compliance functions, you need a human in the loop. Like you just do. And AI may be able to help you flag trends that the human eye might miss, right? But there has to be a human being that can counterman, countervail, and process whatever the data is spinning back.

27:03And this has to be said, there's also huge compliance risk in AI itself. The Reg SP, the cybersecurity rules for registered private funds, which is 5 ,400, 5 ,500 private fund managers are registered with the SEC. They're all under Reg SP now, right? And those LLMs can spin out on it really, really quickly and you can lose proprietary data, right? Like there's all sorts of risks that I think any compliance officer should be naturally worried about. And to the extent that the C-suite sees AI as the answer to their problems, they're not looking at the problems the right way then, right? I think that's absolutely correct.

27:41And I agree with all of that. One of the primary risks is the fact that a lot of these LLMs are trained on the inputs. So if you're putting client information or agreements or confidential information into the models, you may be breaching your confidentiality obligations or your regulatory consumer protection obligations. There have been decisions out of the Southern District of New York and elsewhere in other contexts that putting information into a public LLM is a breach of confidentiality. Now, enterprise versions will allow you to turn off that training feature and you'd want to keep a log of your inputs and outputs and be able to audit it on command.

28:23So there are a number of compliance challenges built to your point regarding AI. And it's something that a lot of our clients are looking at and asking us about on a regular basis. Great. Thanks, everyone. So we're reaching the end of our conversation today. Looking ahead, what trend do you expect will have the biggest impact on fees and expenses over the next couple of years? I think we talked a lot about it, but I think we'll continue to see more around the continuation vehicle ecosystem as no longer an exception, like we've been saying, and that they're just more of the typical private equity toolkit.

28:58So building around that, I think, is something we'll see impact the fees and expenses considerations. I'm focused on co-investments and how the fees and expenses are allocated there. I think that's an interesting dynamic in the market that we've seen develop over the past few years. And I think over the next few years, we'll continue to see it evolve there as well. I'm sorry to be sort of the traditionalist here, but I think valuations is the red meat of all of this. And I think that, again, given the sort of, I don't want to call it a regulatory break, but given the gentler posture out of the current administration, this is a really good time for GPs to be thoughtful and be careful about their valuations.

29:39again, not just because of retail investors, but also because retail investors are coming in and they're going to shed light on valuations and liquidity. And even if a fund isn't involved in retail investors, we can already see how the coming flux of retail investors is sharpening regulatory questions about valuations and sharpening LP's eyes on valuations. Nice. Thanks so much, everyone.

30:07Today's discussion highlights a fees and expenses landscape that is shifting significantly. Amid growing investor scrutiny and mounting demands for transparency, few forces look set to reshape the space more profoundly than AI, which promises to transform how fees are calculated, monitored and reported over the coming years. Thanks again to Colleen, Ted and Bill for joining me. To listen to previous episodes of Data Dive and to download a data pack of the findings discussed in today's episode, head to privatefundcfo.com or privateequityinternational.com. You can also find the full fees and expenses survey on Private Fund CFO.

30:42This episode was sponsored by Witham and Troutman Pepperlock, edited by Eric Fish, and produced by Louise Fordham, Edward Cleaver, and by me, your host, Evie Russman. Thanks for listening.