Private Equity’s Other Illiquidity Premium

“It isn’t what a man has that constitutes wealth. No — it is to be satisfied with what one has; that is wealth.”

– Mark Twain

RESEARCH

Man does an examination of smoothing and other perceived benefits of private equity that have commanded a premium fee despite more cost-efficient alternatives. Some takeaways:

  • There is a 75.7% correlation between the total returns of PE and the public equity market

  • The average company in a buyout portfolio tends to be small and highly levered, two of the characteristics that are typically most punished by public equity markets during downturns

  • PE-owned companies tend to have a higher percentage of shorterterm floating rate debt that is much more exposed to rising interest rates. And a lot more of that debt

  • A liquid PE portfolio has shown the ability to generate greater ‘true’ alpha than US buyouts

  • 2009 was the last vintage of buyout funds to significantly outperform the passive public equity market, with every other year from 2006 to 2014 roughly in line with or underperforming the public market before unrealized gains are taken into account

Source: Man, Preqin; as of 31 December 2022. Note that these are likely conservative numbers as they include only dedicated buyout funds, not capital earmarked for direct deals by large institutional investors or co-investments or other fund types.

Gary Zimmerman of MaxMyInterest shares his take on the Silicon Valley Bank situation, an overview of FDIC, and how to maximize the return on your cash. Link 

Marc Rubenstein with a fantastic financial deep dive into Silicon Valley Bank. Link

Fortunately, Silicon Valley Bank’s resolution plan is still fresh. The bank became large enough in 2021 that regulators required it to draw up a “living will” on a three-yearly cycle. Silicon Valley Bank submitted its first one in December. 

Roger Lowenstein looks at Warren Buffetts’ decision to discuss the politicized topic of stock buybacks in his shareholder letter.  Link 

In his latest shareholder letter, value investor John Hussman explains why he believes the S&P 500 could still could see a 60% decline. Link 

Pras Michél, rapper and member of legendary hip-hop group the Fugees, got entangled in one of the century’s great financial scandals, mediated a high-stakes negotiation between global superpowers and was accused of major crimes. Link

PODCASTS

From 1:02:00 – 1:13:00, Brad Gerstner and the of the hosts have a great conversation on the rise of stock-based compensation over the past decade.

Former head of Farallon Capital Management & 2020 Presidential candidate Tom Steyer talks about his new venture, Galvanize Climate Solutions, a mission-driven investment platform addressing urgent climate solutions.

The Rewind – Calling the Market[3/7/23 – 39 minutes]Apple | Spotify | Google

Howard Marks touches on the difference between price and value, commonalities he’s seen with turns in the market, and how to find an edge today.

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