I am faced with an intellectual dilemma and trying to resolve it. For me, it revolves around intellectual honesty above anything. I can't help but think that Private Equity is a lot of trite mish-mash with the industry growth stemming from statistical artifacts, leveraged beta, errors in institutional investor beliefs about persistence, high expected returns, diversification benefits, etc. (things that don't actually exist). I think PE is the goose that laid the golden egg on this forum, but it seems to me that not enough people comment about how benighted PE really is in the grand scheme of things.
In my mind, leveraged buyouts, at their heart, are no different from stock-picking ( I get the extra diligence and operational changes that goes into PE relative to public markets investing.). But at its heart, it is levered stock picking with massive illiquidity and no creative hedging options. I call it illiquid, long-only, levered, stock-picking (or ILL Stock-Picking, for short). Right now, I am seeing fundamental L/S equity investors get hammered time and again for lack of alpha generation. Yet, somehow ILL Stock-picking a la Blackstone and Apollo is the holy grail of alpha?
I compare this with alternative methods of investing/finance (stat arb, momentum, HFT.. even high-sample size areas like mortgages or commodities) and can't help but think that those forms of investing are more intellectually honest and not as riddled with empirical errors. Simulataneaously I notice that Blackstone is over twice as large by AUM as the next biggest quant fund and scratch my head. I understand that quant strategies may be harder to scale, but it seems like a labor market breakdown to funnel top talent and money to investment programs with questionable alpha generation.
Here is some scientific work to back-up the concerns I'm raising:
- Does Private Equity generate Alpha? - Here is how Eugene Fama, 2013 Economics Nobel Prize winner, would respond:
"We ... emphasize that if private equity managers have skill in choosing good investment projects and bringing them to fruition, the result is a return due to the human capital of the private equity managers. Labor economists would argue that this return goes to the human capital, that is, the managers. Talented private equity managers are the scarce resource here, not investors' capital. As a result, the fees of managers should be set so that private equity investors just get expected returns that compensate them for the high risks of the investments."
"Finally, because the returns to private equity investments have large idiosyncratic random components (in addition to high market sensitivity), a wide range of outcomes is likely purely by chance. It is then predictable that the lucky managers are anointed by investors and the media, and they are flooded with new money from investors, even when past performance is due to luck."
Source: https://famafrench.dimensional.com/questions-answ…
- Historical Performance - "Our analysis suggests that private equity does not seem to offer as attractive a net-of-fee return edge over public market counterparts as it did 15–20 years ago, from either a historical or forward-looking perspective. Institutional interest in private equity has increased despite its mediocre performance in the past decade versus corresponding public markets, and weak evidence on the existence of an illiquidity premium. Although this demand may reflect a (possibly misplaced) conviction in the illiquidity premium, it may also be due to the appeal of the smoothed returns of illiquid assets in general."
Sources: https://www.aqr.com/Insights/Research/White-Paper…, https://www.aqr.com/Insights/Perspectives/The-Ill…
- Performance Persistence - "The conventional wisdom for investors in private equity funds is to invest in partnerships that have performed well in the past. This is based on the belief that performance in private equity persists across funds of the same partnership ... Post-2000 we find little evidence for persistence in buyout funds, except for the lower-end of the performance distribution"
Sources: https://www.calpers.ca.gov/docs/board-agendas/201…, https://pdfs.semanticscholar.org/3c31/135608cf8cb…
- Ex-Ante choice of top-performing PE Firms - If you are betting on pre-identifying good funds to join, then take a look at David Swensen over at Yale. He has been unable to meaningfully outperform the Cambridge Associates average PE return for the past 20 years. For reference, Yale's 20 year historical return on its leveraged buyout investments is 12.1%, while the 20-year PE industry average return, during the same period, according to Cambridge Associates is ~12.32% (this could be survivorship bias, but still quite embarassing if you ask me). If Swensen cannot outperform the PE index despite probably having access to "top decile managers", then why do you believe you can pick a PE firm that will generate gargantuan returns without it being a statistical artifact?
Yale Returns: https://static1.squarespace.com/static/55db7b87e4…
- Is Private Equity Due Diligence Cognitively Feasible? - Here is an interesting paper than comments on attention and judgement. I am skeptical that the 100+ page CIM/IC materials can be cognitvely processed correctly.
"What do we notice and how does this affect what we learn and come to believe? I present a model of an agent who learns to make forecasts on the basis of readily available information, but is selective as to which information he attends: he chooses whether to attend as a function of current beliefs about whether such information is predictive. If the agent does not attend to some piece of information, it cannot be recalled at a later date. He uses Bayes' rule to update his beliefs given attended-to information, but does not attempt to fill in missing information. The model demonstrates how selective attention may lead the agent to persistently fail to recognize important empirical regularities, make biased forecasts, and hold incorrect beliefs about the statistical relationship between variables. In addition, it identifies factors that make such errors more likely or persistent. "
Source: http://www.dartmouth.edu/~jschwartzstein/papers/S…
- Executive Pedigree - "Our findings suggest that the 'best and brightest' do not appear to have a statistically significant edge when it comes to managing public companies. An elite pedigree—the type of pedigree favored by head hunters and corporate boards—is not predictive of superior management. One of the central rationales for Michael Jensen’s campaign (increasing CEO pay by tying it to share price performance) appears, in retrospect, to have little empirical support. These credentials, however, are significantly overrepresented in the CEO biography database. The elite credentials thus benefit the individual, but there is little evidence that these credentials benefit shareholders."
Source: https://verdadcap.com/archive/do-mbas-make-better… , https://verdadcap.com/archive/is-ceo-performance-…
In a word, I am hoping someone can systematically address the concerns I have raised through a rigorous scientific treatment - showing studies with alternative results and a narrative tying those results together to explain how PE got this big. I, for one, cannot see a narrative that explains PE's modern-day zeitgeist.
I think this is an interesting topic. I work in the industry so I am extremely biased. As soon as I read your post I got defensive and thought of the below:
MOIC vs. IRR: I'll just leave this https://www.oaktreecapital.com/docs/default-source/memos/2006-07-12-you…</a">here
Growth perpetuity: Nobody thinks companies growing quickly are going to continue that growth; generally people expect growth to slowdown
Particular pedigrees: Generally a pedigrees serve a purpose; MBAs have great connections to fill seats; consultants have good operating experience; DCM guys probably make good treasurers
What specifically are you reading about DE Shaw and 2S? You do realize LTCM was one of the greatest blow ups of all time, right?
I do wrestle with the idea that the industry is pretty stale all in all and I am looking for financial innovation. Who doesn't want to be in the present day version of private equity in the 80s?
had the same reaction, like the poster was speaking in absolutes almost and didn’t think critically about what he was saying at all. No one uses IRR only or MOIC only, like that’s legitimately something said if you have no idea what you’re talking about. Flipping one cent in one second is not people are looking for at all! Deals happen like this in credit arbitrage / high yield players who try to go buy debt trading at 93c and sell it for 95 a month later. No scale, and small absolute returns. Anyway everyone knows this already I guess.
plus, he essentially pre qualified his statement to apply to (not necessarily shitty) shitty small companies with small compliance, legal, etc. and no formal processes etc. Yeah if you look at people who are running around at random trying to pull in more money anyone can pull numbers out of their ass. Like what’s the point in making an assertion thats limited to something no one disagrees on e.g. people who are trying to sell sometimes misrepresent. Durr?
Returns/MoM/IRR: In my experience, PE firms are well aware of the limitations of these metrics, and almost all DO use IRR, which is best compared to public market returns on a risk-adjusted basis (the most meaningful comparison in my view for most alternatives investors). They are used in the ways you describe because they still work as effective marketing tools. PE, like many other businesses, is sometimes in the public-facing PR/fundraising mode. There are external advisors to LPs who make more statistically meaningful comparisons that you describe. A PE firm's incentive on its own is to present the best version of the story (it is our / the LPs' jobs to be skeptical and push back).
I don't know any PE firm that puts blind faith in Porter's 5 Forces. We don't even use it - would be a bit silly and bookish. We have also almost never hired "pedigree" management teams - we always hire management teams that are either true industry insiders and/or we have worked with in the past so they are a known quantity (less risk).
Having said that, PE is a very human business. For an industry that does so much technology investing, it itself is almost entirely a human-centric services model. The models are basic and built in Excel. The humans choose which analyses to do on the company's data and present the exhibits they think are relevant. [Several of these analyses are more scientific than others - such as comparable growth-multiple regressions, attrition curves] Ultimately, many different people (the deal team, the IC) will look at the data and model, and make a non-scientific/human/qualitative judgment about the investment. There is no formula or aggregator algorithm that makes sense of all the various trends and metrics, and spits out an answer. The entire thing is more of an art than a science.
The industry can certainly do more - use more dynamic tools (Tableau, Power BI), use better/any deal management software, seek larger datasets (from the company and also from their commercial due diligence partners) etc.
But the performance of PE (vs. some hedge funds...) tells me that the status quo is not crazy. Private companies are a different animal and it is honestly just hard to imagine how you do something fundamentally more data-driven and scientific that the hedge funds sometimes do (but I am open to being proven wrong over the next 10 years). Perhaps, that is what good investing is - the human-centric art rather than stiff science.
If you think Private Equity is bad at finance wait until you get a load of Growth Equity... or worse, VC!
I realize I'm in a dedicated fuh-nance forum, but I think it's helpful to decouple the concept of "Finance" and the concept of "Business." Finance is a subset of business, but there are other elements of the business "stack" that are important, like Management, Industry Expertise, Marketing, Product Development, Operations, etc. and every business is going to score differently on requirements for these different axes.
The Private Equity business relies heavily on finance, but it does not rely exclusively on finance - it sources from generally illiquid markets, takes much more operational involvement to get to a liquidity event, and just generally has to deal with a lot more humans - so there's just no universe in which it's an apples-to-apples comparison to a quant hedge fund.
Nobody is pretending that Private Equity is the most exalted form of finance but it also takes a bunch of other skills to be good at it, so generally people don't confuse this. By the same token, nobody is asking a liquid market investor why they don't provide better operational value-add to the companies they invest in, it's just not the same business.
Exactly. I wouldn't consider the primary function of being a PE GP, at the leadership level, finance. The job isn't to be a high-iq financial engineer - its to source and negotiate good deals, hire and advise the right management team, and develop relationships with relevant exit groups (strategic or public).
Your best PE/GE/VC leaders are high-IQ business leaders, and can pay for high-IQ financial services if that is required.
It's interesting that posting an opinion berating PE elicits comments suggesting I don't know what I am talking about without offering scientific evidence to refute some of the points I was raising. Think this kind of shows what I mean - and again I only decided to post this in order to offer a bit of variety to what otherwise seems like a monologue around PE on Wall Street Oasis.
If the only metric by which you judge LTCM is that they blew-up (which I am very aware of), then I think you've sadly missed the point and novelty in what they were doing and the implications it had for finance and investing more generally.
Here is some scientific work to back-up the concerns I raised. I could be wrong, but would love to have scientifically informed views rather than the same old trite mish-mash sold to PE associates.
MOIC vs IRR - the oaktree document is fallacious in my mind - it offers a misuse of IRR (e.g. not using time of fund-start as time of IRR calculation, annualizing returns exagerates returns for short-term investments (no duh) etc.) as the example and then takes it down. If PE is misusing IRR as a measuring stick, then the answer is just that - not that MOIC is better because PE is misusing IRR.
Pedigree - https://verdadcap.com/archive/do-mbas-make-better-ceos , https://verdadcap.com/archive/is-ceo-performance-persistent
I would keep going but have to jump now. Will respond to other points later today.
Making a list of things people are doing wrong is easy and almost useless. Allocators already have an army of analysts that are more than aware of pretty much anything someone could put to a journal so if allocators decide to invest it is always despite those shortcomings. And they do it for one reason: despite the lack of good data and optimized metrics, there is an insane amount of money to be made in private equity. Not only that but allocators are individuals or institutions who already have insane amounts of money. They don't particularly care about the risk-adjusted returns in the way a smaller investor would. I'd say they care mostly about making sure they get a big enough piece of the PE pie and they are more than willing to find a smart person with a strategy that makes sense and who can be trusted.
Will a more scientific approach eventually be discovered? I'm sure it will. Will allocators wait until that research is out before giving out their money? Not at all. So PE funds will be there to fill that demand.
I feel like the OP just finished up a finance class at Booth (purely academic approach not real world) and their eyes are open to the "truth" of PE. It's kinda like some kids in undergrad who finish Psych 101 and are now some expert on how the human mind works.
love the principle of trying to bring something new to the discussion actually and appreciate it. however using your own personal anecdotes to remark on something industry wide is not scientific principle at all. How are you extrapolating this problem (it doesn’t really exist which is why people are questioning what you’re saying).
but don’t you see how you’ve self qualified to the point it’s kind of weird or doesn’t make sense to even think about for most of the original post?
additionally, the standard of determination is kind of irrelevant in the sense that people just use the most ‘seemingly correct’ way and ‘sell’ off of that. The actual investing process for PE companies can use purely IRR when they pre qualify investments of a particular size. IRR and MOIC should be used in conjunction to balance each other’s limitation of scale and timing respectively.
In extending your line of thinking say ways of measuring alpha are OK but not the ‘best’ to possibly exist. We will simply evolve and change and those who a) like everything else learn the ‘system’ or game it the best or b) who are standout above and beyond amazing (e.g. obviously top decile returns, etc), will be successful however these successful people will be so regardless of anything really. They’re not the ones who have problems raising funds. like, they’re already oversubscribed and demand exceeds hard caps by like hella %.
while you may be pointing out an absence of something with IRR, MOIC, or any metric, any limitation is only important in the nitty gritty. Why? Because some funds, firms, strategies are standout great and you wish you could invest with them. They have more people trying to invest with them and give money than their strategies scale to. Agree/disagree? Your problem being posed isn’t too relevant for top performers in any metric because they don’t need or is there any real purpose to better metrics. thoughts? maybe for bottom 75% fighting for investment it matters but rarely does innovation chase middling performers.
Take this perspective with a grain of salt from someone that has never worked a day in PE, but has some experience with public markets and quant trading/hedge funds. I don't really think of PE as a low IQ approach to finance, but a low IQ approach to investing, maybe... Of course, that isn't to say that it's easy (at all). To me, it seems like PE is a much more relationship driven business than public markets investing (duh). There is of course a certain level of analysis that needs to be done, but not to the same extent whatsoever. In private markets, investors can gain an edge by having access to information that others don't have, or by having access to certain relationships -- for example, if a a real estate developer is looking to sell a hot, high profile office building in NYC, there are only so many people/REPE firms that can even get into the room. In public markets on the other hand, people generally all have access to the same information, and it's the analysis of that information that makes the difference. I'm sure this will get MS but to me, public markets are the pinnacle of investing. It's a jungle baby
.
I disagree. Worked both sides, in both ST and IB, and I can certainly say that the DD process and analysis that goes into most PE investment is more complex and rigorous than what you could ever do on a public company, without getting jailed for insider trading. PE-analysts and associates know their companies way better than most equity research analysts/investors know their public companies, just because they can ask for, and are provided with, way more information.
Public equity trading isn't the universe I had in mind. Was thinking stat arb, commodity, mortgage hedge funds, etc... Way more scientifically legit stuff going on there
Exactly.... this is what I am talking about. The truth is there are a number of guys who actually think MOIC is a barometer, hence the "if I can double my money from this business, that would be a nice deal"
but they’re not the ones who succeed and do well. these aren’t the people with top decile returns. anyone’s who works at a good shop will just be like “ok, what’s your point... duh, these people exist but by and large that’s actually not remotely anything we do.”
you’re literally self qualifying to people who suck. the same thing would be someone in public markets investing saying “don’t want to invest because their PE ratio is 12 blah blah blah”
also, people like to filter quantitatively because it reduces the potential investment pool (quant screens, hello?) some have the luxury of enough opportunities to only go forward and doing real diligence on things with certain metrics. You are self qualifying to the 9th realm, using poor logic to justify base characteristics of comparison which is wrong (you haven’t tested those assumptions with anyone in reality, you’re just proposing your conclusions without testing your assumptions), and intermingling insane anecdotes, assumptions, etc.
it sounds like you’re the bad investor for assuming these things- where is your due diligence? you sound like one of those consultants who takes a piece of info and runs with it to eternity making conclusion after conclusion. sometimes it doesn’t match up to reality- when you run into someone who can see thru the BS they’re not ‘defensive’ ‘ignorant’ etc. maybe you’re just saying something stupid and committing the same acts of ‘low IQ’ that you believe others have (which ZERO people in this thread have disagreed on- what’s the point of saying shitty people are shitty and good strategies are good?). You are on a different planet trying to create some logical basis around this dude
What could have been an interesting thread has devolved into insults and petty name-calling but since there has been talk of performance metrics going on, I'll say this:
No PE fund investor in the world ever looks at MOIC and makes a decision on whether to invest in a fund or not. Ditto for IRR. Ditto for DPI. Ditto for RVPI. Ditto for TVPI. You take all of those together at multiple funds and evaluate them. But you don't stop there either. You take the Fund's track record and then run PME analysis to check for out-performance over public markets. You check this both on a IRR and Dollar value added basis. Theres a lot more to slicing and dicing a fund and firm's track record. And guess what, the firms that have received funding are able to show that they add value on all of those metrics or they will simply find it impoossible to raise capital.
It's laughable to say that a PE Partner only considers MOIC or only considers IRR when looking at an investment.
The comment is relevant insofar as you have pointed to MOICs being a particularly unscientific approach in paragraph 2 of your post.
Other people have tried to explain to you what you are missing here but you immediately dismiss them of having Stockholm Syndrome (what?).
When you start talking about monte carlo simulations and other more 'scientific approaches' to PE, you are thinking like a junior Analyst rather a Partner at a PE who has real wealth tied to the deals he or she does. I see this in WSO with folks who ask why VBA is not extensievely used in IB, or why Python is not used in PE.
You see - these 'scientific tools' are not used because ultimately PE (at the Partner level) is substantially more art than science. The future is unknownable yet PE investors have to project a company's operating performance and the corresponding macro environment before deciding to make an investment. This ultimately comes down to a 'sense of the deal', which quite frankly, means the gut instinct of the senior folks on the IC. Deeper / more sophisticated analysis doesnt really mean much in that context. And that's correct - that's how it should be, that's why the senior folks earn the big bucks. This is not an industry where you can input a bunch of stuff into a black box computer program that can then spit out a 'YES/NO' decision, irrespective of how scientific or complex the process is. Money is made in this industry for human pattern recognition, for selecting, managing, retaining and incentivizing management teams (show me a scientific program that can do that), for judgement in managing a bid and exit process, for figuring out how to create value within a business so that it can grow at GDP+. None of the above requires anything more than Class 10 math, an above average IQ and a relatievely high EQ.
So in that sense yes, PE is a low IQ version of finance in the same way that Picasso is a low IQ version of a human being.
Do I have Stockholm Syndrome?
It seems you're looking for something but I don't know what. You seem to want someone to either validate your choice to go into quant funds, or to defend PE as an asset class. I'm not sure anyone really feels like doing that - at least I don't. I recognize that PE has a place in an institutional investor's bucket, especially if you can get into the top firms. I also believe in a basket portfolio approach. I also value quant funds, and pray one day RennTech or my friend's closed quant fund here in HK will accept my capital. For me this is not a binary choice.
Re Yale - I'm going step a bit out of my depth here, but I believe there's multiple factors in portfolio composition, including duration, correlation, degrees of principle protection, liquidity, beta, etc. Yale's endowment has been the top or one of the top performing endowments precisely because of their access to top decile funds, and their outsized allocation to private markets (to venture by the way, moreso than PE). An endowment like Yale's is putting together a mixed basket of assets. So I'm intrigued - seems you don't like the basket of assets, the so-called "endowment model". So what do you propose instead? You're spending time in analysis, what do you think is a better asset mix, and please show your methodology and calcs. Genuinely curious.
It's also interesting to hear you quote CA's stats in particular. I remember meeting w/ CA annually circa 2007-2009. You know what the best performing asset class over a 10 / 15 year was on the books at the time? VC. Why? Because VC absolutely killed it in 1996-2001. Until the party stopped, and from 2001 to 2009 VC was a disaster, with annualized returns of 6%. Why do I share this? To illustrate the mistake of relying on datasets without taking into account that certain asset classes perform really well in certain conditions and at certain times and not in others. That is why endowments take a basket approach to portfolio allocation.
But I'm happy to learn something new. I am genuinely interested in your methodology and thought process, which I hope you can detail. So you want us to believe what exactly? That quant funds are all super-high-performing and we should all go 100% into quant funds? That PE is a shitshow no one should touch? That endowments like Yale are cocking it up and David Swenson needs to be taken out behind the woodshed and shot? I'm really not getting your overall point.
I am faced with an intellectual dilemma and trying to resolve it. For me, it revolves around intellectual honesty above anything. I can't help but think a lot of PE is trite mish-mash with the industry growth stemming from statistical artifacts, leveraged beta, errors in institutional investor beliefs about persistence, high expected returns, diversification benefits, etc. (things that don't actually exist). In my mind, leveraged buyouts, at their heart, are no different from stock-picking ( I get the extra diligence points raised, etc.). But at its heart, it is levered stock picking with massive illiquidity and no creative hedging options. I call it illiquid, long-only, levered, stock-picking (ILL Stock-Picking, for short). Right now, I am seeing fundamental L/S equity investors get hammered time and again for lack of alpha generation. Yet, somehow ILL Stock-picking a la Blackstone and Apollo is the holy grail of alpha?
I compare this with alternative methods of investing/finance (stat arb, momentum, HFT.. even high-sample size areas like mortgages or commodities) and can't help but think that those forms of investing are more intellectually honest and not as riddled with empirical errors. Simulataneaously I notice that Blackstone is over twice as large by AUM as the next biggest quant fund and scratch my head. I understand that quant strategies may be harder to scale, but it seems like a labor market breakdown to funnel top talent and money to investment programs with questionable alpha generation.
In a word, I am hoping someone can systematically address the concerns I have raised through a rigorous scientific treatment - showing studies with alternative results and a narrative tying those results together to explain how PE got this big. I, for one, cannot see a narrative that explains PE's modern-day zeitgeist.
This is simple corporate finance like Corp fin 101. In fact take this q to your professor. Two projects one required 10,000 units of labor and you can invest 1bn into it, it’ll return 12% and wacc is 12%. Project two requires 100 units of labor and invest 100m into hot, it lol return 25% nd wacc is 12%.
You’re looking at the above scenario and shaking your head: what’s your point? That project two (aka quant funds) should have 10k units of labor? Well that investment oppty doesn’t exist or quant funds would be scaled massively. It’s an extremely attractive oppty that’s close to tapped out. If you can get a job, great you’ll make bank. But unless alpha is being destroyed (note fees offsetting alpha is rational - and that’s the long term market equilibrium), pe should not shrink.
Basic Corp fin
Thank IBB. I would love to hear your thoughts on the stats being quote. For me, the reality of HF and PE fund returns don't tie up with OP's points. I was in a BB's cap intro before, serving HFs. I had barely any HF clients returning higher than mid-teens. The exceptions were the highly volatile funds that returned 50%+ one year, and -10% the next. We called them 'rollercoasters.' The PE funds that I knew and worked in had generally consistent returns of 25%+ IRRs and in some cases far more than that. But one would have to have patience as those investments worked their way through their process. Illiquidity challenges were many.
So when I think to OP's point on comparing industry average in PE with the top performing quant funds, I have several thoughts in terms of problems in his analysis from a statistical standpoing. Would love your insights.
not comparing like-for-like: OP is comparing PE industry average returns against the top tier cherry-picked hedge funds. If he's going to be comparing RennTech to a PE average that is illogical. He should compare it to top performing PE funds, and not likely even mega funds like Blackstone, but to funds like Sequoia, Vista and Thoma Bravo. Here in Asia I know of several funds that exceeded 70% and in some cases 100% IRRs. Now repeatabiltiy can be debated, but these funds certainly knocked the cover off the ball, making comparions to industry average irrelevant.
survivorship bias - HFs and quant funds in particular which underperform are shut down. PE funds take 10 years to wind down. This is going to skew any comparison of industry returns beteween the two. When I was in cap intro HF shutdowns and launches were a weekly occurrance. Tough to compare.
volatility and repeatability - Paulson killed it in the GFC. Then the funds wasn't so great thereafter. Not every fund can be as consistent as RennTech or Thomas Howard's Athena funds. The degree to which one can access a consistent and top-performing fund in either PE or quant is key. Few funds in either camp have strong performance and repeatability, but if you can find one, jump in and don't look back. Be grateful for the access. But that's really more of a business operations problem (ie. how does one run a good PE/VC/HF) rather than an asset class selection problem. Put in other words, 'winners win' and it pays to be with a winner.
perverse incentives - many quant funds have been accused of picking up pennies in front of a steamroller because of the risks they take, and the consequences of their models failing. Because HFs are paid on the up returns, but with little consequence from down losses (other than the firm shutting down and the personnel moving) there is continued incentive for HFs to utilize short-term thinking, and take outsized risks which they share with LPs while allowing the LPs to bear the brunt of failures in their strategy.
There's a reason large LPs take a mixed approach between asset classes so that there's a mix of low-correlation risks and liquidities. I think if one is big enough, that's the right way to go about it.
Thoughts?
Didnt read your entire post since its lengthy, but yes PE is quite dumb. (See, I work in the industry and didnt even take time to read your entire post).
Basically, if your buying a company for 7-8x EBITDA, and put on 3-4x of debt. Your IRR will be sick just by keeping it flat and deleveraging the business. Lots of PE guys like to use fancy words like "improve operational efficiencies", "expand margins", "perform strategic add-on acquisitions that benefit form synergies", but this is all bullshit.
Some of the OG PE chads bought 30-50M EBITDA businesses at like 5-6x back in the 80s and 90s, pretty hrad to not make insane returns when buying a business of that scale at such a low multiple.
Ppl might disagree with me but PE is just about buying businsses at low multiples, using a bunch of leverage and pretending to be smart.