Yesterday I wrote about Ludovik Phalippou’s report  “An Inconvenient Fact: Private Equity Returns & The Billionaire Factory”.

My interest had been prompted by an article of Chris Sier’s  I’d re-published on my blog. It showed that 2/3 of the costs of Private Equity investment are not revealed to the investor.

I wrote about private equity in the context of my work with UK DC pensions. But a much wider audience were reading a piece in the Financial Times by Chris Flood. 

The FT is one of very few financial institutions that speak openly on this issue. In February Katy Wiggins had reported

“While the most successful private equity funds still outperform public markets, the worst offer significantly lower returns”.

I was surprised that the FT were running Wiggins’ story questioning Private Equity’s current hegemony.

But Chris Flood’s article , written the other side of the first wave of the pandemic is much stronger in tone.

A handful of super wealthy multibillionaires have accumulated vast riches from running private equity funds that have performed no better on average than basic US stock market tracker funds since 2006.

Not only did the FT run Flood’s piece but it  followed up with this salient statement from its Due Diligence team

The Study that rattled the entire private equity industry

Report says it is difficult to see how the business model can add up given how costly it is

Nobody likes to be told they’re overpaid and that their work’s not that impressive.

Those are the charges laid at the door of the private equity industry in a report this week from Oxford university, provocatively titled

“An Inconvenient Fact: Private Equity Returns & The Billionaire Factory”.

The report’s author Ludovic Phalippou says private equity funds have returned about the same as public markets since at least 2006, but generated about $230bn in performance fees for a small number of people.

He goes on to accuse the industry of a

“wealth transfer from several hundred million pension scheme members to a few thousand people working in private equity”

and to say it’s

“difficult to see how the private equity model could add up given how costly it is”. 

(Side note: the Harvard economist Josh Lerner also found private equity returns lagged behind stocks over the past decade, in this report from February.)

This is the kind of thing that really gets under private equity tycoons’ skin.

In an unusual move, Phalippou showed his academic study to Blackstone, KKR, Carlyle and Apollo and the lobby group the American Investment Council before he published it and invited their comments. They didn’t hold back.

Blackstone went as far as to write a 2,150-word statement accusing the academic of

“a number of very serious statistical and conceptual errors”.

There were sharp exchanges of words with the others, too.

You can read all of the to-ing and fro-ing in the paper here, and the FT recommends you should, because it makes for a rigorous debate even if it’s tediously predictable in places.

And you can delve into the reams and reams of online commentary that the report has provoked,

In an era when nuance on social media often seems to be dead, some of the debate is pretty high quality.  Things get particularly contentious when it comes to the reasons why institutions choose to invest in the funds — a timely consideration since the US’s largest public pension scheme, Calpers, has just said it’ll move deeper into private equity, seeking to juice returns.

Phalippou’s take on the pension funds question: some institutions’ private equity specialists don’t complain about returns for fear of losing their jobs, and some trustees may lack financial literacy.

Blackstone is unimpressed.

“We fundamentally disagree with your portrayal of public pension officials,. These are exceptionally sophisticated investors.” 

“Exceptionally sophisticated investors”

Nobody likes to be told they’re overpaid and that their work’s not that impressive.

That goes for the buy-side as much as the sell-side. In  a separate interchange on diversity yesterday , Phalippou commented on

C-suite white males whose main talent has been to be best-buddy with the other white males that were controlling promotions and appointments

This circularity of praise for and from private equity  and its investors is at last being questioned and it’s good to see that it is being questioned by the FT, Oxford Said Business School and Ludovic Phalippou.

This blog’s for all the public pension officials who aren’t such sophisticated investors to accept the received wisdom of private equity.

One such person commented on another Chris Sier article

 Many larger schemes – who tend to have followed their herd into alternative assets – should also take a hard look at their own agents, whether external consultants or in-house officers, who put them into these onerous (cost) contracts apparently without realising the full ongoing costs of their contractual commitments.

The Railways Pension Scheme now appears at conferences alongside Chris Sier and others and almost boasts of how they went from underestimating their full costs of management and transactions by a factor of five or six times, I think, to now having costs under better control.

If I were a member of that scheme – I’m not, but I know a few who are – I think I’d want to know first of all how the well paid executives of their scheme got them into such onerous contracts in the first place through ignorance or negligence or both.

And I’m sure there are similar tales to be told about other very large UK schemes, the ones which win all the awards but seem unable to own up to their shortcomings on cost control.

It is not just DC pension schemes that need to read Ludovic Phalippou’s work.