PE vs Tiger/SM Asset Class
Hey guys,
Given there is lot of MFPE associates interested in Tiger Cubs. I was wondering how PE and HF as an asset class compare.
1) SMs run at ~60% net exposure (ie. market exposure and not absolute returns) vs PE funds which are essentially uncorrelated with the market. The SMs like Viking have generated ~20% return for quite a while vs Vista Equity at high 20s IRR. If I was a LP allocating capital to alternative strategies, it seems like PE is much more attractive given similar fee structure where PE has higher returns + uncorrelated with market. There are inefficiencies in private market eg. leveraging relationships with mgmt / bankers, operational value add etc vs in public markets where “competitive edge” is purely decision making / judgement.
2) Given top SMs manage lot of capital (eg. Tiger cubs at 30-40bn) with relatively low headcount, is that what drives higher comp at SMs vs MFPE? Also wondering if PE funds can demonstrate operating leverage like SMs who seems to run at a lower headcount.
From what I have seen, PE and HF are considered different asset classes.
PE offers illiquidity premium, multiple arb, operational value add and leverage (not sure how leverage in PE compares to HFs given use of derivates). VC also offers access to early stage disruptive companies.
The valuations for the PE asset class are still correlated with listed comps for the most part.
I am not that familiar with HF subcategories but it’s possible HF strategies such as absolute return are also allocated to at the same time. So PE and HF are not mutually exclusive.
I am not super familiar with Vistas deployment pace but arguably the Viking MOIC is higher due to constantly compounding where Vista money sits idle every few years.
There is that famous quote about not being able to eat IRR.
Note this assumes HF and not the private drawdown funds.
Private Equity actually has a very high market correlation which makes sense from a corporate finance perspective given leverage: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2549705
SM HF people love to talk about the high market exposure PE people are taking and getting away with it by not having to mark-to-market. That being said, quite a few HF managers recently have spoken about having low to zero short exposure (Brad Gerstner, Dan Sundheim) meaning their net portfolio beta is probably pretty high as well.
Yep so if we look at PE as illiquid directional equity strategy. Isn’t it still more attractive vs SM? given higher return profile while having similar market risk?
But in general don’t see why Viking or Tiger Cub would seem so attractive from LP perspective. Definitely see it from analysts view where you have higher comp, closer to decision making and pure investing per say.
I would guess the true uncorrelated HF will be pod shops running market neutral. Interesting given Yale and FoF allocate pretty heavily to absolute returns strategy vs LBO funds.
I think the difference is the magnitude of market beta. For PE it's like 2 and SM HF it's like 1.
I guess another draw would be the amount of capital they can deploy without compressing returns: megafunds IRRs have shrunk quite a bit as they've grown (with the exception of Vista and Apollo, they're just built different).
Fair point definitely agree with deployment pace.
Objectively do you think its harder to maintain/perform as a public mkts PM vs senior PE deals guy?
Seems like in PE you take long time to know if you were wrong vs in public mkts you could be right about biz but still get smashed (shorting game) by market. Just feels like public markets seems lot more risky and as you move up you directly manage large amounts of capital and need to handle volatility of being marked to market. Whereas in PE if you are broadly right about the biz, relationships with right mgmt + bankers for deal flow, you can do very well.
Yeah I would tend to agree. I think from a career perspective it's a risk-reward tradeoff: you can stay in PE and as long as you don't mess up you can collect your carry and be wealthy whereas at a hedge fund, you might have couple of years of bad performance and then you can't raise money or you have good returns so you scale the fund and all of the sudden you're a billionaire.
This can all change depending on specific firm tho, JC Flowers was on track to rival Blackstone and KKR but blew up after 2008 and lost most of their assets and funds like Lone Pine, Tiger and Viking have been consistent outperformers for decades so there's a lot of variability.
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