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PE performance, misleading or buyer beware!

PE is good at presenting themselves in the best possible light to get investors to invest. But the investors are Professional and or Qualified and should do their due diligence accordingly – yet many seemingly do not. This does not mean PE should not be better, but merely that it is very much up to the LPs to “vote with their money” and through that push for the needed change.

An insightful report on private equity…

Every year Hamilton Lane (HL)[1] , one of the largest allocators in PE, publish their Market Overview. The insights in this report are based on what is probably one of the largest repositories of PE data and certainly one of, if not the most precise one.

Aside from Bain & Co’s annual PE report, this is probably also one of the most widely read reports in the PE industry. And, as readers would or at least should know, it reflects HL’s opinion. While certainly biased, which should be expected and of which Hamilton Lane makes no secret, they are also certainly very well informed and rigorous in what they do.

…with an interesting chart…

In Chart 2.17, which HL has kindly let me reproduce here, their analysis shows that the S&P’s current 10-Year return is in the 93rd percentile over the past 30 years, compared with PE’s being in the 73rd percentile. And they go on to make the point that down side risk is probably larger and upside is probably more limited for the S&P 500 than for PE.

All else equal, not least if you appreciate HL’s audience, not unreasonable or unfair conclusions.

Chart 2.17 Rolling 10-Year Return Distributions, S&P 500 and All Private Equity

PE outperforms the S&P 500

Source: Hamilton Lane Market Overview 2021

… that catches the eye of one of private equity’s few and fiercest critics

Ludovic Phalippou, Professor at Said Business School at the University of Oxford[2] and long-time researcher and critic of PE in some of his recent posts, “Hamilton Lane Latest Graph”, takes aim at a number of things in HL’s report. But here notably Chart 2.17.

In short, this is after all a blog post, but I do encourage everyone to read his critique in full, Prof. Phalippou takes issue with

  • The choice of index / benchmark

  • Not making the point that the US stock market never lost money in any ten-year time period, but routinely making this point for PE

  • The chosen time frame

  • Comparing apples with oranges – what is included in PE changes over time, while what is included in the chosen index / benchmark remains the same

And concludes, apart from the obvious that it in his opinion is wrong, that it is also misleading and that HL has conflicts of interest.

Prof. Phalippou makes some very valid points…

I don’t know Prof. Phalippou personally. But have followed him and read his publications for some time. I don’t always agree with him, but I admire his efforts in bringing some needed transparency to the PE industry and through this, greatly respect his courage and tenacity in doing so. His work has at times further caused me to reassess my own views / biases on PE.

PE is, as Prof. Phalippou is often at pains to point out, very opaque and more than most, even in the financial world, is very adept at presenting itself in the best way to raise capital. Through this, along with “creative use” of IRRs, which I agree is at best a faulty measure of performance, they have “orchestrated” a massive transfer of wealth from investors to themselves.

This is all to some extent true.

… but in this case, and unfortunately quite often in his critique of PE, he “plays the man and not the ball”

Yes, the GPs are out to raise and make money, as is presumably Hamilton Lane. But this is not nearly the “deception” that Prof. Phalippou believes it to be

  1. PE is predominantly targeted at Professional and Qualified investors[3] i.e. they should know what they are doing and should ask questions and demand more transparency if needed

  2. Both research and marketing materials, of which the HL report in fairness, even if more of the former, is both, come with substantial disclosures, i.e. readers are not left in doubt as to conflicts of interest, marketing, calculation methodologies, etc.

  3. In any type of report, academic or otherwise, even in a blog, we have to pick some things to present and leave others out. Otherwise an insightful and highly readable report, such as HL’s Market Overview, would quickly quintuple in size and through that become less readable and possibly less clear and insightful

In other words, being “misled” or not is first and foremost the responsibility of the individual reader / investor.

That said, I agree with Prof. Phalippou that the PE industry as a whole could do with more transparency and probably also reliability, ethics, and integrity. But the “problem”, in my opinion, is not solely with the GPs, or the Consultants, or the Advisors, or the Fund of Funds, but also to a very large extent with the end investors, the LPs.

The PE industry should and could be better

Of course, as is often the case when so much money is involved, this change will only come once the providers of capital start making demands of the managers who deploy that capital.

And here is, in my opinion, the crux of the problem. Many LPs, not least the larger ones, fail to do this. In their scramble to get into supposedly highly sought after and oversubscribed funds they do not push for better terms for everyone, increased transparency, better reporting, more ESG, etc., and they do not “vote with their money.”

Should we then blame the GPs for taking advantage of this, or should we also look to the LPs, who after all have a fiduciary duty, to do better?

I look forward to following this discussion

I expect HL will have a riposte to Prof. Phalippou’s critique, and hope they meet his challenge for a debate.

In the meantime, I shall keep blogging and hopefully add a bit of debate and transparency to the industry.

Stay illiquid!


#PrivateEquity #VentureCapital #PEcompass #StayIlliquid #HamiltonLane #Nykredit [1] Full disclosure, my current employer is a client of Hamilton Lane. This blog post is solely my opinion does not necessarily reflect the opinion of any current or prior employers or of Hamilton Lane.

[2] Professor Phalippou heads the Finance Accounting and Management Economics group, is a Fellow at The Queen’s College, and sits on both the investment committee, and wine committee at Said Business School.

[3] In short, Professional investors are those who have sufficient understanding of the asset class. Qualified investors need to demonstrate a sufficient income or net worth before they are allowed to purchase unregistered securities the thresholds will vary depending on jurisdictions.

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