The Private Equity Pitch

According to Vanguard, private equity’s “significant illiquidity and market dynamics provide suitable investors the opportunity to earn long-term excess returns, while increasing portfolio diversification through expanded equity market coverage.”

This is the private equity pitch in a nutshell. It’s obvious theoretically that Illiquid assets in markets that are more difficult to access would have higher expected returns and opportunities for managers to add value by bringing new information to the market, possibly even enough to justify the high fees, estimated at around 6 or 7% all-in.

Timestamps:
0:00 Intro
1:26 Evaluating the performance of private equity is not straightforward
3:30 My bone to pick with the 2014 paper
6:09 Ludovic Phalippou’s insights to private equity
8:02 Testing the diversification claim
11:20 Main takeaways

Referenced in this video:
Private markets rally to new heights: https://www.mckinsey.com/~/media/mckinsey/industries/private%20equity%20and%20principal%20investors/our%20insights/mckinseys%20private%20markets%20annual%20review/2022/mckinseys-private-markets-annual-review-private-markets-rally-to-new-heights-vf.pdf
The Performance of Private Equity Funds: https://academic.oup.com/rfs/article-abstract/22/4/1747/1567648?redirectedFrom=fulltext
Private Equity Fund Debt: Capital Flows, Performance, and Agency Costs: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3410076
Private Equity Performance: Returns, Persistence, and Capital Flows: https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2005.00780.x
Private Equity Performance: What Do We Know?: https://onlinelibrary.wiley.com/doi/10.1111/jofi.12154
An Inconvenient Fact: Private Equity Returns and the Billionaire Factory: https://joi.pm-research.com/content/30/1/11
Private Equity's Diversification Illusion: Evidence From Fair Value Accounting: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2379170
Private Equity Fund Valuation Management During Fundraising: https://www.hbs.edu/ris/Publication%20Files/23-013_00801cda-46cb-48ee-b6ff-c2b705a41a7a.pdf
Rush to Raise: Does Fundraising Pressure Incentivize Strategic Venture Capital Deal Pricing?: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3851819
Interim Fund Performance and Fundraising in Private Equity: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2357570
Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting: https://academic.oup.com/rfs/article-abstract/35/1/299/6136189?redirectedFrom=fulltext



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