Pension funds are taking matters into their own hands in order to avoid the sizeable fees charged by private equity firms. Those fees can run from 2 percent in annual management fees up to 20 percent for performance fees.

And then there’s the problem of zombie funds, undead funds which tie up investors’ cash and continue charging them fees, even if there isn’t much of a chance for the investor to turn a profit from the assets any longer.

pension funds

Reuters reports that many pension funds are beginning to buy direct stakes in companies or joining forces with private equity firms instead of placing money directly in their funds. The media giant reports that this is the first time in the history of buyout firms that they are raising less money from investors.

The article also explains that Preqin, an industry tracker, indicates that 43 percent of investors are looking to increase their co-investments, which involves teaming up with buyout firms and investing alongside them. The result of this business model means that investors reap the benefits of investing in buyout firms without paying the high fees associated with investing directly in them.

Preqin’s surveys indicate that co-investments rose to 36 percent by this year’s first quarter and that it was 33 percent one year ago. Of course it’s hard to tell exactly how much money is being diverted from private equity funds; however, it seems clear that this is a practice that big investors won’t be quitting anytime soon.

Reuters points to a decision by Legal & General, an insurer in the U.K., to buy a 46.5 percent stake in CALA Group with Patron Capital as an example of the growing a co-investment market. The insurer said it plans to invest more directly in areas like energy, transportation, housing and education.

In another example the Canadian Pension Plan Investment Board purchased a stake in Dorna, while the Ontario Teachers’ Pension Plan has also been looking for more investments to make outside of private equity funds.