It’s the least surprising headline of the year so far. “Private equity fee model fails to profit US pension funds”. Well, surprise, surprise. Private equity, with its two-and-twenty fee structure, was not designed to help them. It was designed to enrich the managers of the money, and it has done so beyond the dreams of avarice. These masters of the universe wanted us to believe they could produce such superior returns that investors would be delighted to see them earning so much.

Some of them have, but private equity has mostly proved that beating the market is hard, and beating it by skill rather than luck is harder still. Most of the “superior returns” relied on gearing up with cheap debt and running businesses for cash. The fees, according to the study for the FT, averaged 4%, and the net return of 4.5% a year over the last decade was less than the 6.7% generated from the S&P index of 400 medium-sized US companies.

This is merely one facet of the great financial services scam that is only now becoming apparent. Partners of Goldman Sachs consider themselves pretty special, but when two senior executives unexpectedly departed earlier this month, the bank’s response was to shrug and say: plenty more where that came from. The share price was unmoved despite this exodus of top talent. Bank shareholders have discovered the hard way that far from having their interests at heart, the view of the executives in charge is “Heads I win, tails you lose.”

Investment banking is now so unprofitable that Tom Rayner of Exane believes that RBS’ retreat from the business adds 7% to the value of the bank. He reckons that Barclays might be better off without BarCap – he means the shareholders, of course, not Capn Bob and his crew. The chances of Diamond seeing things Rayner’s way are vanishingly small, but the analysis is uncomfortable, at least.

It’s too much to hope that investment bankers will suddenly decide that they are worth the same as a top surgeon or accountant, but the glory days of shifting billions and keeping the millions that stick to the shovel are surely over. Basel 3 and the Vickers proposals should see to that. The future danger is that the casino players go underground, and that the gamblers find new ways to tap the pools of money in the utility banks. That, though, is a problem for another day.

Advertisements