Private Equity Headwinds — Trouble in Paradise?

To all Private Equitonians:

Does your job add value?

According to Jeff Hooke (former PE director and Lehman banker), the majority (75%) of PE firms do not add value when adjusted for their risk profile, leverage, and liquidity premiums (most have the same returns as the market).

Moreover, he makes the case that since private investments are not marked to market, many firms engage in return smoothing to inflate their value (usually on a quarterly/annual basis). This is great to woo the limited partners during the 5-7 lock up period but the problem arises later when PE firms can't sell their portco's for the returns/valuation they promised.

Obviously, the industry has told a different story on paper. PE has experienced strong returns in the past (specifically early 2000s) and we are currently in an ultra low rate environment which has led to even greater inflows in assets under management for the industry.

However, this increase in capital begins the question: is this bad for the industry? After all, there are only so many companies with stable cash flows to make a successful LBO candidate and more competition/higher bid prices does not help investment returns.

Clearly, PE will always be a useful alternative investment but I'm curious if it could end up like the hedge fund industry where there's essentially too many active managers and competition in the field to generate alpha.

All this said, I'd highly recommend anyone considering a career in PE watch the video, I've attached the link here: