Thoughts on "Private equity barons grow rich on $230bn of performance fees"?
Basically PE had the same return, net of fees, as public equities since 2006.
Article link: https://www.ft.com/content/803cff77-42f7-4859-aff1-afa5c149023c?campaign_id=4&emc=edit_dk_20200615&instance_id=19398&nl=dealbook®i_id=82284452&segment_id=30932&te=1&user_id=025ad9e80fa9801aada0a8a69bc51240#comments-anchor
If you can't access FT, the research paper mentioned is here: https://papers.ssrn.com/sol3/papers.cfm?abstract_…
Curious about what yall think.
I don't think anyone is surprised. The larger a US focused fund is, the more performance will mirror that of the American economy. It's really really hard to outperform the market with a huge amount of capital to deploy.
That's why a lot firms stay a certain size on purpose and Warren B. has talked about how much easier it would be for him to deliver excellent returns if he wasn't managing a massive amount of capital...
Yes, I agree that the larger the fund is, the harder it is to outperform.
My question is, why do these pension funds keep paying the huge fees to get a market return? They could've saved the aggregate $230bn and get extra return for themselves.
My feeling is it's more about diversification. Some in public equities, some in hedge funds, some in PE, some in RE and you have a much broader set of investments that are not perfectly correlated (and in some cases not at all).
You get to smooth out your returns YoY and while that may not provide a better return for the pension fund, I'd imagine it is much safer for those employed there.
You have a point about diversification among different assets, and it's definitely the consensus among pension funds and basically 90% of the investment community.
S&P 500 by itself is a pretty diversified investment and there's no argument that over the long-term equity is the best investment in all asset classes. I've never liked the idea about implement diversification for the sake of diversificaiton.
Most pension funds require a hurdle rate of 7%, and stocks have an annualized return about 6.7% after inflation over the last 200 years.
You should take a look at Swensen's book https://www.amazon.com/Pioneering-Portfolio-Management-Unconventional-I…</a">Pioneering Portfolio Management. It's the playbook for capital allocation. If you want the 15 second summary of the book, look at this https://www.iwillteachyoutoberich.com/wp-content/uploads/Diversified-Po…</a">pie chart.
The point that the above poster is trying to make, I believe, is that the fees are worth hitting these allocation targets, especially when you have a massive endowment and the alternative is writing many, many, small checks.
Thanks, will definitely read up on the book.
Voluptatem illum quia et et cum libero adipisci. Sed soluta iusto corrupti consectetur explicabo illum. Doloribus perspiciatis dolor voluptatem veniam id est non.
Ratione perspiciatis velit et non quia. Soluta molestiae repellat tempora culpa quaerat. At maxime voluptatem corporis repellat minus. Consectetur sed eos laborum sapiente esse nihil. Et nostrum laboriosam perspiciatis odio eligendi.
Asperiores enim officia et aut sit non. Quas dignissimos autem quis nam in assumenda.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...