Evidence for the Atlas Approach
Private Equity
JP Morgan: Private Equity Food Fight
Reviews the debate about whether private equity returns are better than public equity, and concludes there is still a (shrinking) benefit.
Shows that private equity firms have become adept at using subscription lines to raise reported Internal Rates of Return even as achieved multiples of invested capital have been steadily falling (p. 5).
Answering Questions on the Impact of Private Equity Investments on Public Pensions (Pollack – June 2024)
Concludes that the advantage of private equity over public markets disappeared after the GFC and predicts disappointing outcomes going forward for private equity.
A Bottom Up Approach to the Risk Adjusted Performance of the Buyout Fund Market (L'Her, Stoyanova, Shaw, Scott, Lai – July 2016)
After adjusting for appropriate risks, there has been no outperformance of buyout funds vis-à-vis their public market equivalents on a dollar-weighted basis.
Demystifying Illiquid Assets Expected Returns for Private Equity (Ilmanen, Chandra, McQuinn – Winter 2020)
Internal Rate of Return reporting can be especially misleading if compared against the time-weighted returns used for public market indices.
The smoothed returns of private equity understate the true economic risk.
Richening valuations of PE may be a headwind for future returns for the asset class, suggesting a slimmer edge over public equity than long-term averages.
An Inconvenient Fact: Private Equity Returns & The Billionaire Factory (Phalippou – July 2020)
The historical Internal Rates of Return provided by the private equity industry as evidence of its success are exceptionally misleading.
Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting (Stafford – December 2015)
Investors in private equity overpay significantly.
Buy-and-hold portfolios of public companies with similar characteristics earn better risk-adjusted returns than private equity investments.
Valuing Private Equity Investments Strip by Strip (Gupta, Nieuwerburgh – January 2021)
Concludes that private capital funds generate negative alpha.
Discount-Rate Risk in Private Equity: Evidence from Secondary Market Transactions (Boyer, Nadauld, Vorkink, Weisbach – December 2022)
Concludes that PE funds do not outperform on a risk-adjusted basis.
Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting (Stafford – September 2020)
Shows that PE funds underperform a leveraged strategy of investing in listed small value firms.
Estimating Private Equity Returns from Limited Partner Cash Flows (Ang, Chen, Goetzmann, Phalippou – June 2014)
Finds a negative alpha for private equity fund returns net of fees.
Alternative Investments Reality Check Part 3: Private Equity Investing (Frier – December 2023)
A portfolio which bought public companies which have the same characteristics as the companies which undergo take-private transactions, and the same leverage and sector composition as private equity would have generated a higher return than private equity.
Why I am not investing in a buyout for a long time to come (Lewis – April 2023)
A co-founder of AI consulting firm Cambridge Associates makes the case that investing in private equity, which he previously advocated, no longer makes sense .
“Inflated returns, denial of volatility, high prices and fees, excessive leverage, absence of covenants on buyout debt — all this together represents fantasy thinking. It is what happens when a successful investment model becomes too popular.”
Taking the Private Out of Private Equity
A portfolio which bought public companies which have the same characteristics as the companies which undergo take-private transactions, and the same leverage and sector composition as private equity would have generated a higher return than private equity.
Q2 2024 Quantitative Perspectives: Under Pressure (Lewis – April 2023)
Provides statistics regarding the falloff in private equity exits.