"Individual investors should have access to Private Equity"
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"Individual investors should have access to Private Equity"
So says a committee of academics and major financial services firms, including Vanguard.
https://www.capmktsreg.org/2018/10/30/e ... te-equity/
Full report:
https://www.capmktsreg.org/wp-content/u ... INAL-1.pdf
https://www.capmktsreg.org/2018/10/30/e ... te-equity/
Full report:
https://www.capmktsreg.org/wp-content/u ... INAL-1.pdf
Last edited by HEDGEFUNDIE on Fri Nov 02, 2018 4:11 pm, edited 1 time in total.
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Re: "Private investors should have access to Private Equity"
From my perspective it is a serious problem that individual investors do not have access to this market. When only the well connected have the opportunity to participate in this market it causes private investors that would like to invest in these companies to lose out until some of the greatest growth these companies will see has already been consumed. They are then paying to reward those that were granted early access.
BTW - I hold a Three Fund Portfolio.
Cheers
BTW - I hold a Three Fund Portfolio.
Cheers
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Re: "Private investors should have access to Private Equity"
After last week's Frontline program
I'm not sure that retirement programs should be investing in private equity, especially hedge funds.
The majority of people on the KY pension boards were not versed in investments.
I'm not a fan of hedge funds. They are often too opaque in their
dealings, and usually offer huge returns and understate the fees and risks.
Your username would seem to mean that you have the opposite view.
Equity is taken private to avoid SEC rules.
Code: Select all
https://www.pbs.org/wgbh/frontline/film/the-pension-gamble/
The majority of people on the KY pension boards were not versed in investments.
I'm not a fan of hedge funds. They are often too opaque in their
dealings, and usually offer huge returns and understate the fees and risks.
Your username would seem to mean that you have the opposite view.
Equity is taken private to avoid SEC rules.
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Re: "Private investors should have access to Private Equity"
If private equity were made available to individual investors I suspect you will see fees come down dramatically. The huge amount of available capital will just be too attractive for the PE fund managers not to compete down their fees. Not to mention Vanguard, Fidelity, Blackrock, etc. will be aggressively negotiating on their investors’ behalf (so that they can attract even more assets under their banners).MathWizard wrote: ↑Fri Nov 02, 2018 3:51 pm After last week's Frontline programI'm not sure that retirement programs should be investing in private equity, especially hedge funds.Code: Select all
https://www.pbs.org/wgbh/frontline/film/the-pension-gamble/
The majority of people on the KY pension boards were not versed in investments.
I'm not a fan of hedge funds. They are often too opaque in their
dealings, and usually offer huge returns and understate the fees and risks.
Your username would seem to mean that you have the opposite view.
Equity is taken private to avoid SEC rules.
Of course a surge of public money into private equity will also mean that private equity returns will come down as well. In a few years time you may see little difference between private and public equity investment risk/reward profiles.
Re: "Individual investors should have access to Private Equity"
Not understanding.
Why should the government tell me who I should be doing business with?
Why should the government tell me who I should be doing business with?
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.
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Re: "Individual investors should have access to Private Equity"
The government is not telling you to do anything. This group is an advisory body, not technically part of the government.
And even if these changes get implemented, all it will do is give you more investment choices. You are free to stick with the three fund portfolio (although two of the funds might begin to contain some private equity!).
Last edited by HEDGEFUNDIE on Fri Nov 02, 2018 4:17 pm, edited 1 time in total.
Re: "Private investors should have access to Private Equity"
Silk McCue wrote: ↑Fri Nov 02, 2018 3:48 pm From my perspective it is a serious problem that individual investors do not have access to this market. When only the well connected have the opportunity to participate in this market it causes private investors that would like to invest in these companies to lose out until some of the greatest growth these companies will see has already been consumed. They are then paying to reward those that were granted early access.
BTW - I hold a Three Fund Portfolio.
Cheers
Well keep in mind all the protections both legal and otherwise that has enveloped the public sector space to protect retail investing. One could make the argument at least for the US, the cost of doing business within these restrictions costs a small company millions annually. Not to mention the long term vision of a company will also change for better or worse once public (From achieving ABC to achieving ABC with shareholding approval and earnings, or without getting sued by performance chasers). Its the reason I am sure a portion of the companies currently private will likely stay that way for the foreseeable future. An example that comes to mind off the top of my head is SpaceX.
Not to say there are not some mutual fund offerings that offer a small exposure into this space (Fidelity comes to mind), but the reason this portion of the market is locked down to venture capital and big money is due to the lack of regulation and "lawlessness" that many retail investors would cry foul if losing a large portion of their net-worth on. You want retail access, it will require government intervention which will make these smaller and growing companies move elsewhere.
Re: "Individual investors should have access to Private Equity"
Even if Vanguard introduced a mutual fund or ETF that invested in private equity offerings, it would be actively managed, and it wouldn't be cheap.
Re: "Individual investors should have access to Private Equity"
To protect people, just like the USDA and meat. The securities industry has a long history for abusing its clients. Also, as my compliance manager said - never sell anything to a grandmother, they always win in court. The are some great stories on both sides.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: "Individual investors should have access to Private Equity"
The government does not tell you who you can do business with.
It requires companies seeking money from the general public to share certain informations and abide
by certain rules which are enforced by the SEC.
Some investments can avoid those rules, but then they can only sell to qualified (or accredited) investors, which
I believe requires either $200K (300K joint) income or 1 million net worth.
These investments are usually called private equity to contrast them with the public market, the S&P 500 for example.
Private equity might be a single wind turbine in a small wind farm (an example that a relative who is a qualified investor
actually did invest in.)
Re: "Individual investors should have access to Private Equity"
There are firms that allow you to invest in large private companies (assuming you're an accredited investor). Not sure that's what you mean by PE, but it at least allows you to invest in the same companies as the PE firms.
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Re: "Individual investors should have access to Private Equity"
That plea seems perfectly ridiculous.
Also: I see no lack of investing options, otherwise.
Also: I see no lack of investing options, otherwise.
Re: "Individual investors should have access to Private Equity"
MathWizard wrote: ↑Fri Nov 02, 2018 4:34 pmThe government does not tell you who you can do business with.
It requires companies seeking money from the general public to share certain informations and abide
by certain rules which are enforced by the SEC.
Some investments can avoid those rules, but then they can only sell to qualified (or accredited) investors, which
I believe requires either $200K (300K joint) income or 1 million net worth.
These investments are usually called private equity to contrast them with the public market, the S&P 500 for example.
Private equity might be a single wind turbine in a small wind farm (an example that a relative who is a qualified investor
actually did invest in.)
This is not what I meant. Perhaps I was not clear.HEDGEFUNDIE wrote: ↑Fri Nov 02, 2018 4:15 pm
The government is not telling you to do anything. This group is an advisory body, not technically part of the government.
And even if these changes get implemented, all it will do is give you more investment choices. You are free to stick with the three fund portfolio (although two of the funds might begin to contain some private equity!).
I know the group proposing this change is advisory and I know as an investor I can invest as a choose.
I am questioning why a financial company that raises money for a private placement or a private company trying to raise money for its own purposes should have the government tell it who it has to do business with to to raise the money?
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.
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Re: "Individual investors should have access to Private Equity"
In principle I want my total market index fund to invest in all companies in the economy at their market weight. In practice I expect the total market index fund to make all feasible investments. Some companies are infeasible because of the cost or other barriers to ownership. Very very small public companies and privately held companies have always been the most likely companies to exclude because costs are higher than any diversification benefits. In future if some of these companies can be incorporated into index funds at low enough cost, I'm for it. Otherwise, I think total market type index funds as is are sufficient for nearly everyone's stock investing needs.
Regards, |
|
Guy
Re: "Individual investors should have access to Private Equity"
Larry Swedroe has a couple of articles on this. Pretty much he says that Small Cap Value is a good substitute for private equity.
Found one here:
https://www.etf.com/sections/index-inve ... nopaging=1
Another one:
https://www.etf.com/sections/index-inve ... ity’s-myth
And here:
www.advisorperspectives.com/articles/20 ... erformance
Found one here:
https://www.etf.com/sections/index-inve ... nopaging=1
Another one:
https://www.etf.com/sections/index-inve ... ity’s-myth
And here:
www.advisorperspectives.com/articles/20 ... erformance
A fool and his money are good for business.
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Re: "Individual investors should have access to Private Equity"
Individual investors (non accredited) can already own shares in private companies its just that most of them don't make them all that easy to buy. DW and I have shares in a medium sized bank (market cap ~1.5B) and the VC funded company that she works for. There are a lot of share issuing private companies that fit neither the VC or buyout firm description but they never seem to be mentioned in this discussion. After having researched the aggregate returns of buyout funds and VC I don't really feel like I am missing anything not being able to invest in those.
Re: "Individual investors should have access to Private Equity"
Can you take your politics to another message board? This forum is for investing. Thanks.
Re: "Individual investors should have access to Private Equity"
But it doesn’t; simplified, these companies are free to pursue investments from the public, they merely need to observe the disclosure requirements that arise under the Securities Act. They choose not to.Ron Scott wrote: ↑Fri Nov 02, 2018 5:03 pmMathWizard wrote: ↑Fri Nov 02, 2018 4:34 pmThe government does not tell you who you can do business with.
It requires companies seeking money from the general public to share certain informations and abide
by certain rules which are enforced by the SEC.
Some investments can avoid those rules, but then they can only sell to qualified (or accredited) investors, which
I believe requires either $200K (300K joint) income or 1 million net worth.
These investments are usually called private equity to contrast them with the public market, the S&P 500 for example.
Private equity might be a single wind turbine in a small wind farm (an example that a relative who is a qualified investor
actually did invest in.)
This is not what I meant. Perhaps I was not clear.HEDGEFUNDIE wrote: ↑Fri Nov 02, 2018 4:15 pm
The government is not telling you to do anything. This group is an advisory body, not technically part of the government.
And even if these changes get implemented, all it will do is give you more investment choices. You are free to stick with the three fund portfolio (although two of the funds might begin to contain some private equity!).
I know the group proposing this change is advisory and I know as an investor I can invest as a choose.
I am questioning why a financial company that raises money for a private placement or a private company trying to raise money for its own purposes should have the government tell it who it has to do business with to to raise the money?
Re: "Individual investors should have access to Private Equity"
Investors have a long history of abusing themselves. Private equity would simply represent another avenue by which to do it. Tulips anyone?alex_686 wrote: ↑Fri Nov 02, 2018 4:33 pmTo protect people, just like the USDA and meat. The securities industry has a long history for abusing its clients. Also, as my compliance manager said - never sell anything to a grandmother, they always win in court. The are some great stories on both sides.
Re: "Individual investors should have access to Private Equity"
The committee’s proposal would change law to threaten the continued ability of these companies to ignore they larger public when raising money. (See the summary article in the OP’s post.)EddyB wrote: ↑Fri Nov 02, 2018 10:26 pmBut it doesn’t; simplified, these companies are free to pursue investments from the public, they merely need to observe the disclosure requirements that arise under the Securities Act. They choose not to.Ron Scott wrote: ↑Fri Nov 02, 2018 5:03 pmMathWizard wrote: ↑Fri Nov 02, 2018 4:34 pmThe government does not tell you who you can do business with.
It requires companies seeking money from the general public to share certain informations and abide
by certain rules which are enforced by the SEC.
Some investments can avoid those rules, but then they can only sell to qualified (or accredited) investors, which
I believe requires either $200K (300K joint) income or 1 million net worth.
These investments are usually called private equity to contrast them with the public market, the S&P 500 for example.
Private equity might be a single wind turbine in a small wind farm (an example that a relative who is a qualified investor
actually did invest in.)
This is not what I meant. Perhaps I was not clear.HEDGEFUNDIE wrote: ↑Fri Nov 02, 2018 4:15 pm
The government is not telling you to do anything. This group is an advisory body, not technically part of the government.
And even if these changes get implemented, all it will do is give you more investment choices. You are free to stick with the three fund portfolio (although two of the funds might begin to contain some private equity!).
I know the group proposing this change is advisory and I know as an investor I can invest as a choose.
I am questioning why a financial company that raises money for a private placement or a private company trying to raise money for its own purposes should have the government tell it who it has to do business with to to raise the money?
The government should not interfere IMO and the those companies should be free to raise money however they choose to.
The title of this thread says it all: "Individual investors should have access to Private Equity". I say that SHOULD be left up to the companies who are raising the money and we don’t need the government telling them how to do it.
Last edited by Ron Scott on Sat Nov 03, 2018 9:27 am, edited 1 time in total.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.
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Re: "Individual investors should have access to Private Equity"
It's not as clear as it might be that it "includes Vanguard."HEDGEFUNDIE wrote: ↑Fri Nov 02, 2018 3:35 pmSo says a committee of academics and major financial services firms, including Vanguard.
The full paper is somewhat vague about authorship and who actually supports it; that is, it is not signed by a specific list of names. Vanguard's CEO, Tim Buckley, is one of 37 committee members. I don't see anything in the report that says it has the unanimous support every member of the committee. The blurb at the beginning just says that the committee provides reports--empirical, non-partisan reports--but it actually doesn't say anything about the committee's connection to this particular report.
The chief conclusions of the report are that
I am puzzled as to why Vanguard would have an official opinion on this. They do not have any self-interest in retail investors investing directly in private equity funds, nor do they offer closed-end funds as far as I know.First, Congress should allow retail investors to invest directly in private equity funds, so long as such access is provided to retail investors by a financial professional with a duty to act in the best interest of the investor. Second, the SEC should allow retail investors to invest in public closed-end funds that invest more than 15% of their assets in private equity funds.
I'm not saying Vanguard opposes this. I'm saying it's not easy to tell from the report whether Vanguard supports it.
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Re: "Individual investors should have access to Private Equity"
The most actionable takeaway from this topic is that it is irrelevant to a Boglehead.
It has been consistently shown that Hedge Funds, IPOs and Private Equity have similar or worse performance than Active Mutual Funds. The vast majority of them under perform the market every year.
I guess the OP missed the $1M bet that Warren Buffet made that the S&P 500 would out perform a basket of Hedge Funds selected by Protégé Partners. From 2007 to 2017, the S&P 500 had a CAGR of 7.1% and the basket of Hedge Funds had a CAGR of 2.2%.
I lose no sleep not having access to something that is more likely than not to cost me money.
It has been consistently shown that Hedge Funds, IPOs and Private Equity have similar or worse performance than Active Mutual Funds. The vast majority of them under perform the market every year.
I guess the OP missed the $1M bet that Warren Buffet made that the S&P 500 would out perform a basket of Hedge Funds selected by Protégé Partners. From 2007 to 2017, the S&P 500 had a CAGR of 7.1% and the basket of Hedge Funds had a CAGR of 2.2%.
I lose no sleep not having access to something that is more likely than not to cost me money.
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Re: "Individual investors should have access to Private Equity"
Hedge funds are not meant to outperform the market every year. Hence the word “hedge.”Spirit Rider wrote: ↑Sat Nov 03, 2018 10:55 am The most actionable takeaway from this topic is that it is irrelevant to a Boglehead.
It has been consistently shown that Hedge Funds, IPOs and Private Equity have similar or worse performance than Active Mutual Funds. The vast majority of them under perform the market every year.
I guess the OP missed the $1M bet that Warren Buffet made that the S&P 500 would out perform a basket of Hedge Funds selected by Protégé Partners. From 2007 to 2017, the S&P 500 had a CAGR of 7.1% and the basket of Hedge Funds had a CAGR of 2.2%.
I lose no sleep not having access to something that is more likely than not to cost me money.
As for the performance of private equity, you should read the PDF in my OP, starting on page 13.
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Re: "Individual investors should have access to Private Equity"
Ted Seides did not bet Buffett that his portfolio of hedge funds would outperform the S&P 500 every year. He bet Buffett a million dollars that it would outperform the S&P 500, cumulatively, over a period of ten years. If hedge funds are not "meant" to outperform the market over a ten-year period, why did Ted Seides make the bet?HEDGEFUNDIE wrote: ↑Sat Nov 03, 2018 11:09 am...Hedge funds are not meant to outperform the market every year. Hence the word “hedge.”
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Re: "Individual investors should have access to Private Equity"
I don’t know who Ted Seides is or why he did what he did. Probably he was just seeking publicity, how many people get to make bets with Warren Buffett?nisiprius wrote: ↑Sat Nov 03, 2018 8:02 pmTed Seides did not bet Buffett that his portfolio of hedge funds would outperform the S&P 500 every year. He bet Buffett a million dollars that it would outperform the S&P 500, cumulatively, over a period of ten years. If hedge funds are not "meant" to outperform the market over a ten-year period, why did Ted Seides make the bet?HEDGEFUNDIE wrote: ↑Sat Nov 03, 2018 11:09 am...Hedge funds are not meant to outperform the market every year. Hence the word “hedge.”
Hedge funds are not meant to outperform stock markets over any length of time. They are meant to hedge the markets, i.e. provide an uncorrelated source of return. This is why you see institutional investors like pension funds and endowments holding only a small portion of their portfolios in HFs. They’re simply not built to be substitutes for the broader markets.
You would expect to see a hedge fund that lived up to its name outperform bear markets, underperform bull markets, and improve the Sharpe ratio of a portfolio that already held broader market assets.
In any case, this thread is not about hedge funds, it’s about private equity. If Vanguard started to include private equity into TSM would any Bogleheads really complain?
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Re: "Individual investors should have access to Private Equity"
I have not been able to access the link.
It's worth noting that the big problems are liquidity and US tax.
You can buy into Investment Trusts closed end funds that act as limited partners for private equity funds. However US PFIC rules would kill you. All gains would be taxed as income as I understand it. These funds are all listed on London Stock Exchange.
There is also at least one US etf that invests in listed PE vehicles I believe. Not sure what tax position is.a.
The 2nd issue is liquidity. A Limited Partner in a fund does so on a 10 year basis with a 5 year commitment period for new drawdowns. Failure to meet a drawdown means LP Default is triggered and usually loss of all investment to date.
That won't work for individuals. They cannot afford to tie their money up for 10 years. What if they get divorced or die? Want to rebalance? Lose their job?
The Closed End Fund solution would address this. Although calculating your tax might be hairy.
Regulators are wise to be worried about this. Because if you read the history of Blind Trusts they have played a role in many stock market scandals. It's a good way to lose money. Practical transparency of PE funds is very difficult. However closed end funds might be able to perform proper due diligence
Double fees though would be a problem.
The UK funds typically charge 0.6 to 1.0 per cent on top of the "2 and 20" normal for a PE fund ( which all LPs pay)
.
It's worth noting that the big problems are liquidity and US tax.
You can buy into Investment Trusts closed end funds that act as limited partners for private equity funds. However US PFIC rules would kill you. All gains would be taxed as income as I understand it. These funds are all listed on London Stock Exchange.
There is also at least one US etf that invests in listed PE vehicles I believe. Not sure what tax position is.a.
The 2nd issue is liquidity. A Limited Partner in a fund does so on a 10 year basis with a 5 year commitment period for new drawdowns. Failure to meet a drawdown means LP Default is triggered and usually loss of all investment to date.
That won't work for individuals. They cannot afford to tie their money up for 10 years. What if they get divorced or die? Want to rebalance? Lose their job?
The Closed End Fund solution would address this. Although calculating your tax might be hairy.
Regulators are wise to be worried about this. Because if you read the history of Blind Trusts they have played a role in many stock market scandals. It's a good way to lose money. Practical transparency of PE funds is very difficult. However closed end funds might be able to perform proper due diligence
Double fees though would be a problem.
The UK funds typically charge 0.6 to 1.0 per cent on top of the "2 and 20" normal for a PE fund ( which all LPs pay)
.
Last edited by Valuethinker on Sun Nov 04, 2018 7:27 am, edited 2 times in total.
Re: "Individual investors should have access to Private Equity"
Not only would they complain, they would probably exit the fund en masse as quickly as they could (which might be difficult given the lack of liquidity in private equity).HEDGEFUNDIE wrote: ↑Sun Nov 04, 2018 1:19 am... If Vanguard started to include private equity into TSM would any Bogleheads really complain?
If everyone bought "private equity" it wouldn't be "private equity".
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: "Individual investors should have access to Private Equity"
I don’t know, it would seem to me like the “haystack” just got a little bigger. Taylor (if he is being consistent) should be rallying the troops to stick with TSM.JoMoney wrote: ↑Sun Nov 04, 2018 5:46 amNot only would they complain, they would probably exit the fund en masse as quickly as they could (which might be difficult given the lack of liquidity in private equity).HEDGEFUNDIE wrote: ↑Sun Nov 04, 2018 1:19 am... If Vanguard started to include private equity into TSM would any Bogleheads really complain?
This I agree with. Which makes me think that PE fund managers should be dead set against this proposal. Their huge fees are at risk, and their investment universe would be bid up, lowering expected returns.If everyone bought "private equity" it wouldn't be "private equity".
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Re: "Individual investors should have access to Private Equity"
Of course I would. I'd complain a lot, and I'd go looking for a different index provider and index fund. Total Stock isn't supposed to be just a random bag o' stuff someone thinks are good investments.HEDGEFUNDIE wrote: ↑Sun Nov 04, 2018 1:19 am...If Vanguard started to include private equity into TSM would any Bogleheads really complain?...
1) The theory behind cap-weighted total stock market indexing is that it is supposed to mirror the "market portfolio," which consists of all of the assets trading within a market. That means the public market. Since private equity doesn't trade freely, publicly, or frictionlessly in the same market as stocks, none of the equilibrium and other assumptions behind indexing hold.
2) Vanguard presents Total Stock as "designed to provide investors with exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks," while CRSP presents the CRSP US Total Market Index as "representing 100% of the U.S. investable equity market." Including private equity in either of them would be a fundamental change in the nature of the product. Even if I believed that it would be a better investment to add something to Total Stock--junk bonds? commodities? cryptocurrency? I would be opposed to adding them as part of Total Stock because that is not what this product is supposed to be.
3) Total Stock is a mutual fund, not a CEF. There is a problem with the idea of holding private equity in a mutual fund: private equity is illiquid. Mutual funds are required by regulation to provide daily liquidity, which among other things required daily determination of NAV. There is obviously a problem when a fund that's required to be liquid and easy to value holds assets that are illiquid and hard to value. For this reason, there's been a longstanding rule that a mutual fund must limit illiquid holdings to 15% or less of the fund’s net assets. But recently, even this has proved problematical and the SEC is actually tightening liquidity rules and imposing other restrictions. The need for tighter management of liquidity risk was demonstrated by the collapse of the Third Avenue Focussed Credit Fund in 2015.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: "Individual investors should have access to Private Equity"
Thank you for such a lucid explanation.nisiprius wrote: ↑Sun Nov 04, 2018 9:28 amOf course I would. I'd complain a lot, and I'd go looking for a different index provider and index fund. Total Stock isn't supposed to be just a random bag o' stuff someone thinks are good investments.HEDGEFUNDIE wrote: ↑Sun Nov 04, 2018 1:19 am...If Vanguard started to include private equity into TSM would any Bogleheads really complain?...
1) The theory behind cap-weighted total stock market indexing is that it is supposed to mirror the "market portfolio," which consists of all of the assets trading within a market. That means the public market. Since private equity doesn't trade freely, publicly, or frictionlessly in the same market as stocks, none of the equilibrium and other assumptions behind indexing hold.
2) Vanguard presents Total Stock as "designed to provide investors with exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks," while CRSP presents the CRSP US Total Market Index as "representing 100% of the U.S. investable equity market." Including private equity in either of them would be a fundamental change in the nature of the product. Even if I believed that it would be a better investment to add something to Total Stock--junk bonds? commodities? cryptocurrency? I would be opposed to adding them as part of Total Stock because that is not what this product is supposed to be.
3) Total Stock is a mutual fund, not a CEF. There is a problem with the idea of holding private equity in a mutual fund: private equity is illiquid. Mutual funds are required by regulation to provide daily liquidity, which among other things required daily determination of NAV. There is obviously a problem when a fund that's required to be liquid and easy to value holds assets that are illiquid and hard to value. For this reason, there's been a longstanding rule that a mutual fund must limit illiquid holdings to 15% or less of the fund’s net assets. But recently, even this has proved problematical and the SEC is actually tightening liquidity rules and imposing other restrictions. The need for tighter management of liquidity risk was demonstrated by the collapse of the Third Avenue Focussed Credit Fund in 2015.
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Re: "Individual investors should have access to Private Equity"
Nope.nisiprius wrote: ↑Sun Nov 04, 2018 9:28 am
1) The theory behind cap-weighted total stock market indexing is that it is supposed to mirror the "market portfolio," which consists of all of the assets trading within a market. That means the public market. Since private equity doesn't trade freely, publicly, or frictionlessly in the same market as stocks, none of the equilibrium and other assumptions behind indexing hold.
https://en.m.wikipedia.org/wiki/Roll%27s_critique
Equity is equity. Whether it is publicly traded or not is irrelevant to the fundamental value drivers of the asset class. Equity is still the right to the remaining cash flows of the firm after debt obligations are satisfied. This is a difference in kind to bonds, commodities and crypto. So any “Total Stock” fund would be more comprehensive by definition if it held more of the world’s private stock.2) Vanguard presents Total Stock as "designed to provide investors with exposure to the entire U.S. equity market, including small-, mid-, and large-cap growth and value stocks," while CRSP presents the CRSP US Total Market Index as "representing 100% of the U.S. investable equity market." Including private equity in either of them would be a fundamental change in the nature of the product. Even if I believed that it would be a better investment to add something to Total Stock--junk bonds? commodities? cryptocurrency? I would be opposed to adding them as part of Total Stock because that is not what this product is supposed to be.
Re: "Individual investors should have access to Private Equity"
Yes, but see "THE MARKET PORTFOLIO MAY BE MEAN-VARIANCE EFFICIENT AFTER ALL" by Levy and Roll, Review of Financial Studies January, 2010.HEDGEFUNDIE wrote: ↑Sun Nov 04, 2018 9:37 amNope.nisiprius wrote: ↑Sun Nov 04, 2018 9:28 am
1) The theory behind cap-weighted total stock market indexing is that it is supposed to mirror the "market portfolio," which consists of all of the assets trading within a market. That means the public market. Since private equity doesn't trade freely, publicly, or frictionlessly in the same market as stocks, none of the equilibrium and other assumptions behind indexing hold.
https://en.m.wikipedia.org/wiki/Roll%27s_critique
we find the minimal variations in sample parameters required to ensure that the proxy is mean/variance efficient. Surprisingly, slight variations in parameters, well within estimation error bounds, suffice to make the proxy efficient. Thus, many conventional market proxies could be perfectly consistent with the CAPM and useful for estimating expected returns.
And they conclude:We show that small variations of the sample parameters, well within the range of estimation error, can make a typical market proxy mean/variance efficient.
More important for this discussion, the efficiency of public markets is a feature of public markets. The efficiency derives from their public nature. It does not mean that private markets share this property. Note that saying "private markets may not be efficiently priced" need not mean that one can identify a set of active managers who can predictably outperform the private markets or public markets by exploiting this inefficiency. Whether that is true is a matter for empirical tests.These findings suggest that the CAPM (i.e., ex ante mean/variance efficiency of the market index proxy) is consistent with the empirically observed return parameters and the market proxy portfolio weights.
It is very hard to get unbiased data for private equity markets precisely because they are private. No requirements for regular reporting. Funds can choose who to tell about their results and when to do so. As far as I know, there are no studies using unbiased data that show outperformance of private equity on a risk adjusted basis after costs. If there I would love someone to cite them.
High fees. Opaque investments. Low liquidity. Performance persistence, to the extent it exists at all, may be only in the poorly performing funds, with little or no ability to predict who will perform well.
Other than those minor details, sounds like a great idea. I can wait for someone to "help" me by making private equity available to the masses. This is one member of the hoi poloi who is not interested.
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Re: "Individual investors should have access to Private Equity"
Third Avenue is a really important precedent.nisiprius wrote: ↑Sun Nov 04, 2018 9:28 am
3) Total Stock is a mutual fund, not a CEF. There is a problem with the idea of holding private equity in a mutual fund: private equity is illiquid. Mutual funds are required by regulation to provide daily liquidity, which among other things required daily determination of NAV. There is obviously a problem when a fund that's required to be liquid and easy to value holds assets that are illiquid and hard to value. For this reason, there's been a longstanding rule that a mutual fund must limit illiquid holdings to 15% or less of the fund’s net assets. But recently, even this has proved problematical and the SEC is actually tightening liquidity rules and imposing other restrictions. The need for tighter management of liquidity risk was demonstrated by the collapse of the Third Avenue Focussed Credit Fund in 2015.
What *should* have happened, perhaps, is that 3rd Av fund was turned into a Closed End Fund. Then the managers could have liquidated the assets over a sensible timeframe.
The CEF structure is really the most appropriate one where underlying investments are totally or mostly illiquid. This is why we have the REIT structure, and it could perhaps be extended to cover Private Equity. Main issues would appear to be tax-related.
There *is* a case for extending investing to PE if the vehicles exist - many of the ones I have seen so enrich the managers that they are not worth consideration. That latter problem may not be resolvable.
(if you look at the Kaufman Foundation report on venture capital investing, ie not Private Equity Leveraged Buy Out deals, but equity stakes in hopefully fast-growing early stage companies, it's pretty dire. Swensen takes one through why the odds are totally stacked against the investor).
Hedge Funds I am less clear because their underlying assets are liquid equities and bonds - so why not invest in those directly? Exceptions for short only funds (Swensen outlines the advantages of same) and for example, distressed credit hedge funds (these typically have 3 year minimum commitments by investors).
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Re: "Individual investors should have access to Private Equity"
By the way, note that the full report draws a bright line between mutual funds and closed-end funds, because of liquidity concerns.
It is only closed-end funds for which they recommend a change:On p. 37, somebody wrote:We believe that the existing 15% threshold on illiquid assets for mutual funds is appropriate, considering that investors frequently enter and exit their mutual fund investments. For example, according to a 2015 SEC staff study, monthly net outflows from mutual funds often exceed 10% of total assets. We therefore do not recommend any regulatory changes to expand retail investor access to private equity funds through mutual funds.
On page 39, somebody wrote:In our view, retail investors would benefit from access to public closed-end funds that invest more than 15% of their assets in private equity funds. Moreover, we believe that sufficient regulatory protections exist to ensure that retail investors can safely invest in these funds. We therefore recommend that the SEC should not apply the accredited investor standard on a look through basis to public closed-end funds that invest more than 15% of their assets in private equity funds.
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Re: "Individual investors should have access to Private Equity"
We accept then that index funds should hold REITs because the underlying asset is not quoted.nisiprius wrote: ↑Mon Nov 05, 2018 5:07 am By the way, note that the full report draws a bright line between mutual funds and closed-end funds, because of liquidity concerns.It is only closed-end funds for which they recommend a change:On p. 37, somebody wrote:We believe that the existing 15% threshold on illiquid assets for mutual funds is appropriate, considering that investors frequently enter and exit their mutual fund investments. For example, according to a 2015 SEC staff study, monthly net outflows from mutual funds often exceed 10% of total assets. We therefore do not recommend any regulatory changes to expand retail investor access to private equity funds through mutual funds.On page 39, somebody wrote:In our view, retail investors would benefit from access to public closed-end funds that invest more than 15% of their assets in private equity funds. Moreover, we believe that sufficient regulatory protections exist to ensure that retail investors can safely invest in these funds. We therefore recommend that the SEC should not apply the accredited investor standard on a look through basis to public closed-end funds that invest more than 15% of their assets in private equity funds.
There are very few US CEFs that hold quoted equities and I am not sure if they are included in, for example, Vanguard TSM (or other indices) or not. In the UK this is a significant issue and I think most All-Share tracker funds omit the Investment Trust subsector (to avoid double exposure to quoted equities).
So the above would work for PE funds - it would give investors diversified access to PE funds, where the CEF acts as a Limited Partner. PE fund managers would welcome this because it potentially gives them permanent capital - normally they are on a constant cycle of paying out to investors from older funds and then fund raising for a new fund.
Downsides include possible conflicts of interest where the PE fund manager is too closely tied to the board of the CEF. That's what happened to Permira (Schroder) in the crash and they had to revise the terms of the Investment Trust as a result.
Also can the CEF itself use leverage? Because then you can get leverage on leverage. That should worry Financial Stability regulators.
It won't have escaped regulators notice though that "blind trusts", and leveraged utility trusts in particular, were features of stock market crashes, and utility trusts in the case of 1929. There is going to be an issue of transparency because the valuation of the underlying assets is subjective, not objective, by its nature.
With REITs and buildings this is OK. There are objective industry standard views of how to value a building (rent, terms of tenancy, etc.).
WIth PE investments it is all that much more subjective. Is the correct EV/ EBITDA multiple 10x or 12x? That's not something where there is a definitive answer, until the investment is sold. Be too conservative and you are disadvantaging those selling, too optimistic and those buying.
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Re: "Individual investors should have access to Private Equity"
The "leverage" question is interesting, I keep wanting to dig into it but I don't know how. In theory, one of the protections afforded by the Investment Company Act of 1940 is supposedly a strict limitation on leverage. The regulations are for good reason; before 1940 investment companies had a bad name, often using leverage and too-often collapsing. The rule is often expressed in language like this (from Investopedia)
The problem is that it apparently only applies to direct, literal leverage--borrowing money. Obviously nowadays many mutual funds are using derivatives to obtain much higher leverage than that. I don't have any personal basis to judge the risk proposition involved in doing that, or why the regulators don't view it as an evasion of the rule.By law, the maximum amount of leverage a mutual fund can use is 33.33% of its portfolio value. If the portfolio is valued at $1 million, it may borrow up to $333,333 to increase its buying capacity.
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Re: "Individual investors should have access to Private Equity"
My guess, and it's only that, is that for a garden variety mutual fund the risk to investors is low. That the regulators would see through any attempt to gear up - see it as a violation of the spirit of the rules.nisiprius wrote: ↑Mon Nov 05, 2018 6:23 am The "leverage" question is interesting, I keep wanting to dig into it but I don't know how. In theory, one of the protections afforded by the Investment Company Act of 1940 is supposedly a strict limitation on leverage. The regulations are for good reason; before 1940 investment companies had a bad name, often using leverage and too-often collapsing. The rule is often expressed in language like this (from Investopedia)The problem is that it apparently only applies to direct, literal leverage--borrowing money. Obviously nowadays many mutual funds are using derivatives to obtain much higher leverage than that. I don't have any personal basis to judge the risk proposition involved in doing that, or why the regulators don't view it as an evasion of the rule.By law, the maximum amount of leverage a mutual fund can use is 33.33% of its portfolio value. If the portfolio is valued at $1 million, it may borrow up to $333,333 to increase its buying capacity.
However various more exotic funds have emerged (Absolute Return funds, etc.). I don't know how the regulators would treat that.
I was reading about the debate whether Long Term Capital Management should have been "bailed" (there was no public money involved). Whether in doing so, the authorities confirmed the market's supposition that any excessive leverage situation would be bailed out by the authorities. "Too much to fail" so to speak.
That set the stage for the dot com bubble and bust. But more seriously, for the Lehman debacle.
The only thing worse than a bailout allowing market participants to not pay the full price of their risk, is one which sends a false signal that they *will* be bailed out, and then they are not.
Re: "Individual investors should have access to Private Equity"
The whole thread is political because this hasn't even reached the stage of proposed legislation. There is nothing actionable because it has nothing to do with current law.
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Re: "Individual investors should have access to Private Equity"
Full disclosure -- most of my clients are in this industry. There are two questions here. First, should ordinary investors be allowed to invest in private equity? Second, should ordinary investors invest in private equity?
The first question is quite straightforward. If you subscribe to a Nozickian worldview that the responsibility of government is to protect people from force and fraud, then there's no philosophical reason why people shouldn't be allowed to invest in anything so long as it passes SEC procedures and blue-sky laws intended to give appropriate disclosure to the public. The accredited investor rules, for example, are kind of silly. Earlier in my career, I was FINRA registered Series 7, Series 63, and Series 79. I was part of the process that underwrote some of these darned thing and knew more about them than you could shake a stick at -- but because I was under the net worth / income cap, I couldn't actually invest in them. It's kind of like saying the guy who builds a car isn't allowed to buy the car because his net worth isn't at a certain level, even if he could afford the car.
The second question is a bit trickier. If I rephrase it to be a bit punchier, I would ask: "Will ordinary investors, if they could access private equity, be rewarded with superior risk-adjusted returns?" and "Will private equity firms be able to maintain their performance track record if they permit ordinary investors to participate?" I think (and this is my opinion only) the answer to both is no. Here is why.
The first question is quite straightforward. If you subscribe to a Nozickian worldview that the responsibility of government is to protect people from force and fraud, then there's no philosophical reason why people shouldn't be allowed to invest in anything so long as it passes SEC procedures and blue-sky laws intended to give appropriate disclosure to the public. The accredited investor rules, for example, are kind of silly. Earlier in my career, I was FINRA registered Series 7, Series 63, and Series 79. I was part of the process that underwrote some of these darned thing and knew more about them than you could shake a stick at -- but because I was under the net worth / income cap, I couldn't actually invest in them. It's kind of like saying the guy who builds a car isn't allowed to buy the car because his net worth isn't at a certain level, even if he could afford the car.
The second question is a bit trickier. If I rephrase it to be a bit punchier, I would ask: "Will ordinary investors, if they could access private equity, be rewarded with superior risk-adjusted returns?" and "Will private equity firms be able to maintain their performance track record if they permit ordinary investors to participate?" I think (and this is my opinion only) the answer to both is no. Here is why.
- Growth / returns trade off. There is some weak evidence that as assets grow in size, returns begin to taper off because of a lack of investment opportunities. So far this has not yet hit private equity, but the classic example I always think of is Berkshire Hathaway. If you do a Portfolio Visualizer on BRK, you'll find that they've roughly tracked the S&P in recent years. In fact, Warren is openly advocating people index in his recent investor letters, whereas in earlier years, he's urged them to buy more Berkshire.
- Access to quality, part 1. There is some evidence that while 1) most private equity does not outperform market indices, 2) top quartile funds do, and 3) top quartile tends to be sticky unlike ordinary "actively managed" funds - ie. if your current fund is top quartile in performance, your next one is likely to be so as well. There's all sorts of theories as to why this is the case... the one I tend to believe is that the T. Rowe Prices of the world can't participate in board governance and driving strategic direction, while private equity investors (who are control investors) do. There is also some evidence that having a concentrated blockholding (ie. not 1000 fund managers each holding 0.1% of outstanding shares) drives superior returns.
- Access to quality, part 2. The whole point of part 1 is that there is a finite universe of private equity funds that outperform, and a finite (and shrinking) universe of assets that they can invest in to get an acceptable return. Top quartile PE funds tend to be oversubscribed from institutional investors and HNW individuals. There are two dynamics here: 1) PE funds want to reward their longtime investors by granting them preferential access to new funds, and 2) PE funds will likely have no interest in carving out an allocation for ordinary retail investors who are small-dollar and will require additional overhead to service.
- Liquidity. PE funds can have lockups of 10 years or more, with irregular reporting of returns and asset values because they are illiquid assets. PE funds do not want investors who might, for whatever reason, have to withdraw assets within that window and often do not permit it.
- A version of this has already been tried, and flopped. About 10 years ago, the major PE funds (KKR, Blackstone, Carlyle) all IPOs. A few years ago, Carlyle even offered mutual funds to ordinary retail investors, which flopped and were shut down in 2015. These efforts failed for two different reasons. First, the listed equities for the major PE funds did not grant access to the portfolio companies' performance themselves. PE funds typically get paid on a "2-and-20" basis (actual numbers may vary), that is 2% on all assets under management no matter how they performance, and 20% on all gains over a benchmark. The listed equities of these PE funds based their values on the 2% of assets under management (slow growth) and not the 20% outperformance. So investors essentially bought an expensive asset management firm that wasn't ordinarily open to retail investors and fundraised from a limited pool of investors every few years. Second, the Carlyle mutual funds acknowledged that you could not structure a mutual fund (that ordinary investors could buy and sell at will) that invested in private equity given the liquidity lockups and dearth of opportunities if everyone came flooding in. So their mutual funds were actually "liquid alternative" funds with a "mandate to invest across equities, debt, real estate, commodities and currencies using exchange-traded funds". In other words, they were hoping people would see the "Carlyle" brand, think "private equity", and then buy it, without realizing that it wasn't investing in private equity.
Re: "Individual investors should have access to Private Equity"
Investors may think private equity is a great deal, hence the clamor for it. But the people selling private equity presumably think it's a bad deal for investors - or at least, not a great one.
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.
Re: "Individual investors should have access to Private Equity"
dumbmoney wrote: ↑Mon Nov 05, 2018 8:04 am Investors may think private equity is a great deal, hence the clamor for it. But the people selling private equity presumably think it's a bad deal for investors - or at least, not a great one. One group is wrong, and I tend to think the sellers are smarter.
(Yeah, one can have a theory that public markets are broken (blame regulation or whatever), and private equity is just better for everyone. But I don't believe that).
Is it perhaps a variation on the gold market? If someone has gold and they want to sell it to me for USD, then they are clearly signaling they believe that said money can be turned into (via other investments) something more valuable than gold. That should - and does - signal to me to stay away from gold.
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Re: "Individual investors should have access to Private Equity"
Let me put a finer nuance on this:
- The vast majority of private equity funds are bad, nay terrible deals.
- There is some evidence that some private equity funds are good deals. Furthermore, there is some evidence that these good deals can be readily identified.
- You (and ordinary investors in general) do not have access to these good deals, a little bit because the government will not allow you to invest in them, but mostly because the sellers don’t want you as an investor.
Re: "Individual investors should have access to Private Equity"
I don't take the boom of private equity as meaning anything as far as the investment desirability of private equity. It just means there's more of it.columbia wrote: ↑Mon Nov 05, 2018 8:09 am Is it perhaps a variation on the gold market? If someone has gold and they want to sell it to me for USD, then they are clearly signaling they believe that said money can be turned into (via other investments) something more valuable than gold. That should - and does - signal to me to stay away from gold.
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.
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Re: "Individual investors should have access to Private Equity"
Here is what Vanguard has to say about private equity:
Understanding Alternative Investments: Private Equity Performance Measurement and Its Role in a Portfolio
Understanding Alternative Investments: Private Equity Performance Measurement and Its Role in a Portfolio
The paper can be interpreted as weak support for inclusion in a portfolio as a whole, but I think it's a stretch. It is far from an endorsement.Our study indicates that private equity investments are far riskier than public equity investments. In addition to the conventional risks of the securities markets, private equity investments entail significant and unique risks, including a long investment horizon, rigid liquidity constraints, and high bankruptcy rates among portfolio companies. There is a widespread perception that successful private equity investments can provide both exceptional returns and enhanced portfolio diversification. Our findings indicate that superior performance is possible, but that returns can be difficult to realize. Our findings also suggest that diversification should not be considered a major benefit of private equity investing. Rather, private equity should be treated as but one small component of a portfolio’s allocation to all equity investments, private and public.
...Measuring the returns from private equity is complicated by the very nature of the asset class. For much of the life of a private equity investment, there is no market price for the holding.... Although the National Venture Capital Association (NVCA) has created guidelines for evaluating the net asset value (NAV) of private equity investments, the group has no legal power to enforce compliance....
...A more significant problem is that NAVs can be distorted. For instance, fund managers engage in stale pricing, by which they assign old values to investments even if evidence of a change in value exists; or they practice managed pricing, by which they price their private investments subjectively....
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Re: "Individual investors should have access to Private Equity"
In fact it's a negative sign.dumbmoney wrote: ↑Mon Nov 05, 2018 8:35 amI don't take the boom of private equity as meaning anything as far as the investment desirability of private equity. It just means there's more of it.columbia wrote: ↑Mon Nov 05, 2018 8:09 am Is it perhaps a variation on the gold market? If someone has gold and they want to sell it to me for USD, then they are clearly signaling they believe that said money can be turned into (via other investments) something more valuable than gold. That should - and does - signal to me to stay away from gold.
If you read what the Bain consultancy has to say in its private equity report (annual) the EV to EBITDA (effectively P to E) ratios of deals keep going up -- to the point where they are no longer significantly cheaper than quoted companies (of the same sector). Fund raising may not quite be to the peak of the last cycle, but it's in similar size.
That's going to force down returns. There tends to be a 10+ year cycle to this thing and we are getting due another downturn.
Right now we are moving towards the peak of a debt cycle, so the extra EV has tended to come from debt rather than equity - at least in stats I last looked at a couple of years ago.
When the economic and credit cycles turn, there will be a lot of pain taken. Mostly by Limited Partners, it has to be said.
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Re: "Individual investors should have access to Private Equity"
These things (CEFs which invest in PE) have been around a long time in the UK. I've owned one of them for 20 years or so and another for 15 years or so (during which time it has changed managers twice). Of recent years, they have underperformed the bull market - and I more or less would have expected that -- in a bull market things tend to get a bit indiscriminate. Also this bull market is characterized by a very narrow advance - the FAANGs + Microsoft, and that is a global phenomenon. By definition, PE funds don't invest in Apple or Google.Badger1754 wrote: ↑Mon Nov 05, 2018 7:53 am Full disclosure -- most of my clients are in this industry. There are two questions here. First, should ordinary investors be allowed to invest in private equity? Second, should ordinary investors invest in private equity?
The first question is quite straightforward. If you subscribe to a Nozickian worldview that the responsibility of government is to protect people from force and fraud, then there's no philosophical reason why people shouldn't be allowed to invest in anything so long as it passes SEC procedures and blue-sky laws intended to give appropriate disclosure to the public. The accredited investor rules, for example, are kind of silly. Earlier in my career, I was FINRA registered Series 7, Series 63, and Series 79. I was part of the process that underwrote some of these darned thing and knew more about them than you could shake a stick at -- but because I was under the net worth / income cap, I couldn't actually invest in them. It's kind of like saying the guy who builds a car isn't allowed to buy the car because his net worth isn't at a certain level, even if he could afford the car.
The second question is a bit trickier. If I rephrase it to be a bit punchier, I would ask: "Will ordinary investors, if they could access private equity, be rewarded with superior risk-adjusted returns?" and "Will private equity firms be able to maintain their performance track record if they permit ordinary investors to participate?" I think (and this is my opinion only) the answer to both is no. Here is why.
- Growth / returns trade off. There is some weak evidence that as assets grow in size, returns begin to taper off because of a lack of investment opportunities. So far this has not yet hit private equity, but the classic example I always think of is Berkshire Hathaway. If you do a Portfolio Visualizer on BRK, you'll find that they've roughly tracked the S&P in recent years. In fact, Warren is openly advocating people index in his recent investor letters, whereas in earlier years, he's urged them to buy more Berkshire.
- Access to quality, part 1. There is some evidence that while 1) most private equity does not outperform market indices, 2) top quartile funds do, and 3) top quartile tends to be sticky unlike ordinary "actively managed" funds - ie. if your current fund is top quartile in performance, your next one is likely to be so as well. There's all sorts of theories as to why this is the case... the one I tend to believe is that the T. Rowe Prices of the world can't participate in board governance and driving strategic direction, while private equity investors (who are control investors) do. There is also some evidence that having a concentrated blockholding (ie. not 1000 fund managers each holding 0.1% of outstanding shares) drives superior returns.
- Access to quality, part 2. The whole point of part 1 is that there is a finite universe of private equity funds that outperform, and a finite (and shrinking) universe of assets that they can invest in to get an acceptable return. Top quartile PE funds tend to be oversubscribed from institutional investors and HNW individuals. There are two dynamics here: 1) PE funds want to reward their longtime investors by granting them preferential access to new funds, and 2) PE funds will likely have no interest in carving out an allocation for ordinary retail investors who are small-dollar and will require additional overhead to service.
- Liquidity. PE funds can have lockups of 10 years or more, with irregular reporting of returns and asset values because they are illiquid assets. PE funds do not want investors who might, for whatever reason, have to withdraw assets within that window and often do not permit it.
- A version of this has already been tried, and flopped. About 10 years ago, the major PE funds (KKR, Blackstone, Carlyle) all IPOs. A few years ago, Carlyle even offered mutual funds to ordinary retail investors, which flopped and were shut down in 2015. These efforts failed for two different reasons. First, the listed equities for the major PE funds did not grant access to the portfolio companies' performance themselves. PE funds typically get paid on a "2-and-20" basis (actual numbers may vary), that is 2% on all assets under management no matter how they performance, and 20% on all gains over a benchmark. The listed equities of these PE funds based their values on the 2% of assets under management (slow growth) and not the 20% outperformance. So investors essentially bought an expensive asset management firm that wasn't ordinarily open to retail investors and fundraised from a limited pool of investors every few years. Second, the Carlyle mutual funds acknowledged that you could not structure a mutual fund (that ordinary investors could buy and sell at will) that invested in private equity given the liquidity lockups and dearth of opportunities if everyone came flooding in. So their mutual funds were actually "liquid alternative" funds with a "mandate to invest across equities, debt, real estate, commodities and currencies using exchange-traded funds". In other words, they were hoping people would see the "Carlyle" brand, think "private equity", and then buy it, without realizing that it wasn't investing in private equity.
It's been possible to make very good money in them, if you were in the right funds.
I think it would be harder to construct such a vehicle in the USA under current US tax and securities law -- my other posts outline why I think that..
Re: "Individual investors should have access to Private Equity"
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