phalippou private equity

LP: As I’ve said, there’s now a strong momentum towards greater transparency. He has recently written a book called Private Equity Laid Bare in which he challenges the assumption that private equity is the no-brainer investment that many institutional and high-net worth investors believe it to be. Lurking behind all this is a broader policy fight. Now, a small but growing body of academic research has started to challenge yet another widely accepted investment truism: that private equity has been the best-performing asset class over the past decade. Large public pension funds have received a net Multiple of Money (MoM) that sits within a narrow 1.51 to 1.54 range. We make no representations as to the accuracy, completeness, suitability or validity of any information on this site and will not be liable for any errors or omissions or any damages arising from its display or use. But I am not aware of any law suits won by the plaintiffs on any related matters. Are private equity investors being similarly misled? Judging by his Professor Phalippou’s, Four financial priorities for young adults. Such funds are often the default investment option in their plan and are chosen by plan sponsors who are obliged to look out for employees’ interest. IRR factors in the speed at which private equity hands back capital to investors after it’s put to work. His argument focuses primarily on the mathematical limitations of how investment returns are measured in the private equity industry, as well as what the appropriate benchmark should be. That is, private equity returns are often benchmarked to global equity indices yet, by Phalippou’s estimation, approximately 70% of private equity is invested in North America. Nine Buyers for Every Seller of Private Equity as an Asset Class. Is private equity an accident waiting to happen? © 2020 Forbes Media LLC. It is based on facts and rigorous studies. The Evidence-Based Investor is produced by Regis Media, a boutique provider of high-quality content and social media management for evidence-based advice firms. In the US, as a side product of the financial crisis, the Senate asked the SEC, among a long list of things, to look into PE. Clearly, Apollo is not making this claim. Tell me, how did you first become interested in the private equity space, and what did you set out to achieve with your book? The most common measure of investment performance in private equity is internal rate of return (IRR), a calculation that is so institutionalized that industry reporting standards (GIPS) mandate its disclosure. LP: There’s basically nothing. Ludovic Phalippou, Professor of Financial Economics at Oxford University’s Saïd Business School, found that the number of PE managers with personal wealth of more than $2 billion has risen from three to 22 in 15 years. Now aged between 20 and 39, this is no longer a generation... Money is a means to an end, not an end in itself. Here is an example of misleading reporting. A small number of private equity barons have accumulated vast riches from running funds that have performed no better on average than simple index funds, according to new research. All rights reserved. During the study’s measurement period, the number of billionaires in private equity increased from three in 2006 to 22 at the end of 2019. After all, truisms require neither proof nor support because they are, by definition, self-evident. The Evidence-Based Investor is produced by Regis Media, a specialist provider of content marketing for evidence-based advisers. Joe can be more subtle though. Ludovic Phallipou demonstrates his intimate knowledge of the industry with ease, citing historical transactions and firms throughout the text as well as creating easy-to-understand examples with fictional characters. Opinions expressed by Forbes Contributors are their own. Ludovic Phalippou and Maurizio Zollo November 2005 Abstract Using a novel and comprehensive database on both US and EU private equity funds and their underlying investments, we study the drivers of private equity fund performance. A recent paper by Ludovic Phalippou, a professor of financial economics at University of Oxford’s business school, found that private equity has performed in line with comparable public stocks. Photographer: Illustration: Stella Murphy for Bloomberg Businessweek, Private Equity Abuzz Over Access to $6 Trillion 401(k) Market. Private Equity (PE) funds have returned about the same as public equity indices since at least 2006. If they succeed it will take them a while, and I don’t see them succeeding without massive help from regulators. Does the basis include transaction costs? Also, think about the interests of Pension Fund X. “The problem is these numbers are not what you think they are,” says Phalippou. In a blog post published in December 2019, The chief investment officer at CalPERS, the largest public pension fund in the United States, is quoted in today’s, At the same time, the Trump administration is edging closer toward allowing, As with the mutual fund industry, there are powerful vested interests determined to maintain the status quo. It’s that simple. Private Equity, like God, moves in mysterious ways. Let’s use plain language on private equity performance, Beware private equity funds that muddy the water on performance, Private equity returns are not what they seem. But, on the other hand, there’s also enormous lobbying and resistance. Private equity investors now have new fodder to evaluate old truisms. Earlier in my career, I was a Senior Managing Director at Bear Stearns and a portfolio manager-analyst at Lazard Asset Management. Most investors in PE knew about most of these things, or at least were suspecting it was happening. Ludovic Phalippou is an economist who has written a paper detailing the workings of the Private Equity industry and how it manages to pay itself $230bn from our money. In addition, there will be room for interpretation. Investors can achieve similar, and perhaps slightly better results, Stafford said, with a portfolio of publicly traded small-cap value stocks. You may opt-out by. LP: There are no rules when it comes to reporting performance. This in turn produces an IRR result that is implausibly high if it is being thought of as a rate of return that an investor actually earns. The headline figure is therefore useless. Many PE firms seem to be ethical and try to minimise conflicts of interest, even if that costs them money. He’s also seemingly unafraid to add a little panache to the dusty world of academia. The study also argues that the comparison between investment returns in public equities versus private equity is further obfuscated by a mismatch in benchmarks. One possibility is making PE part of a target-date fund, a popular option that mixes investments in stocks and bonds and gradually reduces exposure to risky assets as investors reach their retirement date. A JD, CPA, and CFA charterholder by background, I have published four books on M&A with McGraw-Hill. (He suggests that Yale could still report a high IRR if it switches to a since-inception IRR.). But you need to check how everything is defined. The chap doing PE there is the PE expert. But the Oxford study is by no means the first to raise serous questions about the net returns delivered by private equity funds. It features in this week’s FT as one of its top read stories Truisms don’t just exist in pop culture; the investment management industry is replete with examples. RP: Thank you your time, Ludovic. That adds to potential profits but also to risk and complexity. Yale cautioned that it would be inappropriate to assume that it compounded the 106% annual return over 20 years because the mechanics of an IRR calculation assume reinvestment of those unusually high, early gains at the same rate of return for two decades. RP: In traditional asset management, there’s a small number of firms, notably Vanguard, that are trying to be more transparent and keep costs down for consumers. Ludovic Phalippou is Associate Professor of Finance at the University of Oxford’s Said Business School. Phalippou is not the first academic to challenge the consensus view about the private equity industry, although he’s arguably becoming one of the most prolific; Phalippou has penned 28 research studies over the past 15 years that question nearly aspect of the industry, including performance, risk, selection, and regulation. Yes, PE returns appear to be smoother than for public stocks, because investors aren’t confronted with rising and falling prices every day. LP: Private equity is a perfect research topic. Phalippou also applies this line of thought to several private equity giants’ annual reports. Even still, KKR’s and Apollo’s since-inception IRRs will be the same in 50 years, assuming no major disasters, according to Phalippou. Again, though, everything is secret and PE firms have excellent and creative lawyers. I always emphasised that this was a first-order issue in PE. Even more than the mutual fund industry, Professor Phalippou claims, the private equity sector is riddled with conflicts of interest. Even still, investors are hungry for more. How can this be? It’s a huge market, with huge sums at stake, and huge consumer welfare implications, and yet there’s relatively little research done on it. Be this as it may, institutional investors certainly don’t seem to be complaining. “But when you look at the returns numbers for the last decade… it’s hard to feel that there’s really been much alpha at all.”. Full disclaimer. LP: There are so many conflicts of interest, but here’s an example. All Rights Reserved, This is a BETA experience. Also, half of the book is about the investors in PE funds, which is part of the business that’s neglected in other books. Each definition changes the actual cost. LP: There is a whole spectrum, but there isn’t a non-profit PE firm which would be a Vanguard equivalent. The most obvious consequence of making a noise would be that Pension Fund X will stop doing PE and its PE expert will be jobless. There is at least some oversight in the mutual fund space, and there’s misleading information there. However, an important footnote in Yale’s annual report adds key perspective: that the 106% return was heavily influenced by large distributions during the Internet boom of the late 1990s. RP: You argue in your book that fees and charges for PE funds are even more opaque than they are for mutual funds. Investors cite diversification and high absolute returns as the two most popular reasons for investing in private equity, with return expectations roughly 1.5x that of the next-highest alternative offering. One recent study that has sparked debate was published in June by Ludovic Phalippou, a professor of financial economics at the University of Oxford’s Said Business School. Large private equity managers have disputed his findings. Contact Regis Media Disclaimer: All content is for informational purposes only. Per the study, private equity was the best-performing asset class over the preceding 10-year period, with an average return of 14.3%. The “Millennials” are growing up. No one cared. Are there firms that are trying to do the right thing in private equity? He has recently written a book called Private Equity Laid Bare in which he challenges the assumption that private equity is the no-brainer investment that many institutional and high-net worth investors believe it to be. An Inconvenient Fact: Private Equity Returns & The Billionaire Factory Ludovic Phalippou* University of Oxford, Said Business School Private Equity (PE) funds have returned about the same as public equity indices since at least 2006. We make no representations as to the accuracy, completeness, suitability or validity of any information on this site and will not be liable for any errors or omissions or any damages arising from its display or use. Why is this significant? But for trustees and CIOs, this is way too specialised and difficult for them to understand. Assuming an investment period of approximately four to five years, this 1.5x MoM implies an annual return of approximately 11% — precisely in-line with the buy-and-hold returns achieved simply from investing in relevant public equity indices during that period. Ludovic Phalippou has produced a wealth of evidence in recent years that there is too much opacity surrounding both costs and performance in private equity.

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