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 – Private Equity’s Other Illiquidity Premium (14 pages)

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.


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