In last month’s hearing on the private equity industry by the US House of Representatives Financial Services Committee, one pension trustee was repeatedly asked the same question: what was the best performing asset class for his fund?

“Let’s see. I think this is the seventh time I’ve had to answer this question,” said Wayne Moore of the Los Angeles County Employee Retirement Association in response to Ohio representative Anthony Gonzalez. “It’s private equity.” Moore was visibly frustrated, as the issues he wanted to raise about transparency and fees seemed to be drowned out by this one fundamental point. Net returns – as far as some on that committee were concerned – trumped every other talking point.

This may not be the right stance to take. Moore made the point that – notwithstanding the net returns – the private equity programme constitutes more than half the pension’s investment management costs. You can argue that the net returns make this point irrelevant, but his unease is shared by other investors in private equity funds. In this year’s LP Perspectives Survey published this week –  73 percent of LPs agreed that private equity fees are “difficult to justify internally”. Last year, the figure was just 63 percent. Meanwhile, 60 percent have asked their GPs for greater fee transparency in the last 12 months.

Yes, net returns have been exciting enough to keep institutional investors coming back with bigger cheques. Yet the other noise – objections to the absolute dollar cost of private equity and increasing public suspicion of its role in the ‘real economy’ – may well be damaging to the industry in the long term.

The Stop Wall Street Looting Act – a proposal fuelled by anti-private equity sentiment – would potentially stop US PE investing in its tracks. Although few believe that anything resembling it will ever make it into law, it may surprise some readers to learn that LPs are not 100 percent opposed to its various elements. More than a fifth of respondents to our survey favour taxing carried interest as income; and, remarkably, more than a fifth are in favour of making financial sponsors liable for portfolio company debts.

As we head into 2020, the private equity industry will have to work to justify its licence to operate. The corporate world is making noises about working for all stakeholders, rather than just shareholders. For private equity, focusing solely on net returns to justify its existence may not cut the mustard.

Write to the author: toby.m@peimedia.com