Con Keating and Edi Truell (a trilogy in the making?)

Con Keating has sent me this post, in reply to Edi Truell’s recent linked in post on his recent blog “Safe as Houses”.

I no longer subscribe to Linked-In (I find its security appalling) but I have been told that Eddie Truell posted the following comment on this blog cross-posted there.

“Thank you – an interesting read. Particularly interested in residential housing as an asset class. 

However, Con ignores political risk where left wing governments impose rent controls every other generation ( when they have forgotten the pernicious effect ). 

I do take issue with his canard that Private Equity can be replicated by leveraging small cap equities. Totally ignores the long series data sets that show that PE has far better Risk adjusted returns. A diversified PE portfolio demonstrates real Alpha and resilience.”

I did not mention rent controls though they dominated the UK residential rental market throughout my student and early career years. Indeed, they are quite common in both state and municipal form in overseas markets to this day. They are also not solely the domain of left-wing governments – though concerns with social or subsidised housing do tend to be. Clearly this would have had to have been considered extensively (and no doubt expensively)  by the various institutions proposing to enter the rental market at scale. These institutions will also tend alter the nature of the UK private rental market which is dominated by small scale landlords – they may even go far in closing the inefficiency gap between gross and net rental returns, which at around 30% -35% are far larger than their European equivalents where institutional ownership is far higher. Institutional landlords are also through their lobbying power likely to lower the possibility of rent controls being imposed. I have not come across any explicit form of regulation of rent to buy – a somewhat convoluted case can be made that they are a form of hire-purchase and clearly these contracts are subject to oversight by the FCA and the principle of treating customers fairly. It does seem likely that private landlords will attract the attentions of HMT and new taxes imposed – perhaps alongside variation of the treatment of carried interest in private equity / venture capital.


My principal reason for not mentioning the possibility of rent controls was that these contracts can easily be recharacterized as partial purchases rather than rentals.


The point left/right division is less obvious in policy terms. Home ownership is supported by all parties in the UK. The population at large is in favour of building more houses and this is evident regardless of gender or political leanings, just not in my back yard. It may surprise but polling also finds that the population would like to see lower house prices, but again presumably not mine. I was absent overseas for the majority of the last great decline in houses in 1990 -1994 but discussion of negative equity and impoverished over-mortgaged house buyers were a staple of both tabloids and broadsheets and reached overseas.


We are currently at something of a turning point in Conservative housing policy – the build 300,000 units annually has been quietly dropped. Brown-fill rather than green-fill is now the planning requirement. The once mooted relaxations of planning procedures are not happening. Now the irony of this about-turn is that the ‘academic’ cover for it, such as it is, is a paper produced by Ian Mulheirn, who is Chief Economist of Renewing the Centre at the Tony Blair Institute for Global Change. This paper “Tackling the UK housing crisis: is supply the answer?” challenges the consensus that the problem is one of supply.


Moving to the question of private equity performance, my earliest discussion of this took place in 1980 in the bar of the Intercontinental Hotel in New York and when I left NYC for London in 1984 my P.A. joined one the major PE houses and made a very substantial fortune before retiring. For the purpose at hand I reviewed as many publications as I could find – going back as far as the late 1980s – and I spoke with a number of their authors. The results were mixed – the trade and sponsor literature was boosterish and universally positive – the academic publications shifted emphasis over the decades growing increasingly sceptical. The quality and rigour of these studies has increased over time – problems such as the conceptual value of assets held, liquidity and the proportion of committed funds deployed have been largely (but not completely) overcome. I would recommend reading the publications of the Private Equity Institute at Oxford’s Said Business School and the work of Ludovic Phallipou in particular.


There have been periods when PE has produced strong performance – this appears to have driven the development of the market is its early days – but there have also been sustained periods of underperformance. The business model of the PE managers could, unkindly, be described as heads I win, tails you lose. With this in mind I decided to do my own analysis – a process which took over a year – that work led to my conclusion that I could reproduce market average performance using leveraged listed small cap – which of course would carry a massive cost advantage.


I was also concerned by the present state of the PE market – dry powder is at an all-time high and the prices now being paid appear to be at a premium to listed equity of the order of 70%. This does not make for an attractive vintage. I wonder and worry about the development of ‘continuation funds’.


I will end by saying that I have been impressed by the power of the PE lobby – notably over performance fees for DC and DB funds, but also in other areas such as the LTAF.



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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