This short paper focuses on alignment of interests between the investor and the asset manager. We examine three key elements: performance fees, coinvestment and employee ownership. Generally, if asset management firms incorporate these three elements, then interests are likely to be better aligned. Yet investors should always try to understand whether the three elements really improve alignment, as this is not always the case. In fact, sometimes the opposite is true.
We conclude that there are no shortcuts to assessing alignment. Rather, investors should thoroughly understand the asset management firm’s culture and the manager’s true motivation. To get a sense of a firm’s culture, a client should clearly understand a firm’s commitment to improve returns for existing investors rather than bolster its assets under management. Portfolio managers should also be genuinely, and not simply financially, motivated to outperform.