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Do You Really Need 'Private' Investments? (Independent Vanguard Adviser, 05.27.2025)
The following excerpt is from a book titled The Humble Investor (Chapter 6: The Private Equity Bubble) published earlier this year. The book's author, Daniel Rasmussen, is very skeptical regarding private equity.
“Private equity makes a beautiful pitch: high returns, low risk, stock-picking, operational improvement, a superior form of capitalism. But studying the rise of private equity—and understanding its pitfalls— shows just how hollow so many of these promises are. By ignoring the marketing, and instead, focusing on what we know about these companies, we come to a very different conclusion. Who, after all, wants to put 40% of their portfolio in highly leveraged, low-margin micro-cap stocks that trade at valuations in excess of the S&P 500 with 10-12 year lock-ups at 2% and 20% fees? Yet that is what most of the top university endowments are doing today.”
David Stein (Money for the Rest of us Podcast) stated that its not a great time to be investing in PE.
- fundraising has slowed tremendously - there are tons of PE firms that can't sell their firms due to various reasons - tons of liquidity problems - uni endowments are selling at tremendous discounts because they are so illiquid - PE firms are needing to raise liquid capital to let investors out of old PE investments out.
The excerpts shown here are a very small section of Mr. Zweig's entire report. I stronly recommend that his report be read in it's entirety. The above link should be free to all.
Wall Street is promoting a colossal lie.
Money managers are in a desperate race to stuff illiquid, so-called private-market assets into funds anyone can buy, including your 401(k). They say we all can earn high return and low risk with nontraded “alternatives” like private equity, venture capital and private real estate.
Because private assets don’t trade, it’s the fund managers—not the market—that determine what they’re worth. That enables the managers to report much fewer and lower fluctuations than public funds do. Then they get to declare that private funds are low risk.
That’s ridiculous. In the real world, risk is the chance of losing money, which has nothing to do with how often prices are reported. Cliff Asness, co-founder of AQR Capital Management, calls the smooth returns reported by alternative funds “volatility laundering.”
Owning an alternative fund is a lot simpler than selling it. When you own it, you might take the manager’s valuations for granted, even if that’s a bad idea. When you sell it, the valuation matters—a lot. That’s a risk.
In short, an alternative fund can claim to be low risk and to be at least partly liquid—but, sooner or later, it won’t be able to sustain both claims at once. That’s true here, and for all the other funds hoping to rope in a much wider base of everyday investors.
Remember that as politicians ease the way for alternative funds to land in your retirement plan.
Jeffrey Ptak shares his views about stuffing private equity/private credit into target-date strategies.
“I’m not necessarily worried about a doomsday scenario where there’s a failure in one target-date series— say, they get redemptions and can only partially fulfill the request— and that spooks participants in unrelated target-dates, in a kind of cascade. That’s not unthinkable, of course, but it’s not the main thing I get hung up on.”
“Rather, it’s the risk we’ll see a gradual erosion of confidence in target-dates as the simple, low-cost, quintessentially utilitarian retirement solution they’ve become. Trust is a brittle thing and when you start playing around with illiquid securities— in the name of 'optimizing' an allocation—you can test the limits of bend-but-not-break.”
And private equity deals are micro caps generally. The median market cap is less than $200 million, about $180 million. And again, micro caps as a corner of the public equity market are tiny, tiny, tiny. Single-digit percentages. And yet you’re seeing very sophisticated investors—endowments, foundations, even pension funds—putting 40% of their money in private markets. This is a massive, massive overweight of micro-cap companies in their portfolios. So first of all, there’s a flood of money, an excessive amount of money relative to the opportunity set flowing into this space. The second part is around risk. If there’s one thing we know about really small companies is that they’re distinctly more risky, distinctly more risky than large companies. They’re more likely to go bankrupt. They’re less diversified. They’re more volatile. And the next thing that we know is that private equity deals are leveraged. They borrow a lot of money.
And so, you’re looking at leveraged companies, very leveraged companies that are very small. You’re looking at a very, very, very risky set of companies. And so to take 40% of your portfolio and put it in these very small, very leveraged, very risky companies is a very, very risky decision to do.
All that money sloshing around makes me think rates aren't high enough.
Glad my 403b is not under the influence of such people sitting on our state investment committee!
You might want to look under the hood of your State Pension Plan...here's CT Teacher's Pension Plan...both Private Investment and Private Credit are part of their portfolio...17.8% in fact.
And private equity deals are micro caps generally. The median market cap is less than $200 million, about $180 million. And again, micro caps as a corner of the public equity market are tiny, tiny, tiny. Single-digit percentages. And yet you’re seeing very sophisticated investors—endowments, foundations, even pension funds—putting 40% of their money in private markets. This is a massive, massive overweight of micro-cap companies in their portfolios. So first of all, there’s a flood of money, an excessive amount of money relative to the opportunity set flowing into this space. The second part is around risk. If there’s one thing we know about really small companies is that they’re distinctly more risky, distinctly more risky than large companies. They’re more likely to go bankrupt. They’re less diversified. They’re more volatile. And the next thing that we know is that private equity deals are leveraged. They borrow a lot of money.
And so, you’re looking at leveraged companies, very leveraged companies that are very small. You’re looking at a very, very, very risky set of companies. And so to take 40% of your portfolio and put it in these very small, very leveraged, very risky companies is a very, very risky decision to do.
All that money sloshing around makes me think rates aren't high enough.
Daniel Rasmussen is very skeptical of private investments in equity/credit. I just finished reading his book, The Humble Investor.
my guess is the move from defined benefit to defined contributions have tremendously hurt the PE world.
I read that 88% of pensions invest in PE at an average allocation of about 14%. and the amount of assets available to pensions has been cut in half as a percentage of the market over the past 30 years or so.
Comments
(Chapter 6: The Private Equity Bubble) published earlier this year.
The book's author, Daniel Rasmussen, is very skeptical regarding private equity.
“Private equity makes a beautiful pitch: high returns, low risk, stock-picking, operational improvement,
a superior form of capitalism. But studying the rise of private equity—and understanding its pitfalls—
shows just how hollow so many of these promises are. By ignoring the marketing, and instead,
focusing on what we know about these companies, we come to a very different conclusion.
Who, after all, wants to put 40% of their portfolio in highly leveraged, low-margin micro-cap stocks
that trade at valuations in excess of the S&P 500 with 10-12 year lock-ups at 2% and 20% fees?
Yet that is what most of the top university endowments are doing today.”
- fundraising has slowed tremendously
- there are tons of PE firms that can't sell their firms due to various reasons
- tons of liquidity problems
- uni endowments are selling at tremendous discounts because they are so illiquid
- PE firms are needing to raise liquid capital to let investors out of old PE investments out.
Excerpts from a current Wall Street Journal article by Jason Zweig
The excerpts shown here are a very small section of Mr. Zweig's entire report. I stronly recommend that his report be read in it's entirety. The above link should be free to all.
“I’m not necessarily worried about a doomsday scenario where there’s a failure in one target-date series—
say, they get redemptions and can only partially fulfill the request—
and that spooks participants in unrelated target-dates, in a kind of cascade.
That’s not unthinkable, of course, but it’s not the main thing I get hung up on.”
“Rather, it’s the risk we’ll see a gradual erosion of confidence in target-dates
as the simple, low-cost, quintessentially utilitarian retirement solution they’ve become.
Trust is a brittle thing and when you start playing around with illiquid securities—
in the name of 'optimizing' an allocation—you can test the limits of bend-but-not-break.”
https://jeffreyptak.substack.com/p/foia-gras
I can only hope that people are paying attention to the warnings, and to who is pitching the sales.
pension-fund-reports
I just finished reading his book, The Humble Investor.
I read that 88% of pensions invest in PE at an average allocation of about 14%. and the amount of assets available to pensions has been cut in half as a percentage of the market over the past 30 years or so.