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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.
“Since the early 2000s, pension funds have increasingly added private assets to their investments.”
“Private assets didn’t measurably improve pensions’ returns, says JP Aubry, associate director of research at the Center for Retirement Research at Boston College, who conducted a study on them. Before the financial crisis of 2008-09, they outperformed broad market, passive strategies slightly, while they underperformed after.”
“Private assets might have a certain cachet, but public markets work just fine, says Jason Kephart, senior principal, multi-asset manager research at Morningstar. 'People who have invested in public markets over the last 15 years have done well.'”
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.
That's precisely why I am NOT in my state pension plan! My entire 403b is in a vanilla quality equity-only American Fund. I don't trust state pension board 'experts' or investment committees ... if I'm going to lose (or make) money in my account, *I* want to be the one responsible.
That's precisely why I am NOT in my state pension plan! My entire 403b is in a vanilla quality equity-only American Fund.
If you are a public school teacher I believe you are contributing to your state pension through monthly (payroll deductions) that are mandatory contributions to help fund the state pension fund. Your state also is required to contribute and often state's choose not to fully fund. Big problem when they don't.
Your 403(b) is an additional retirement option that you elect to contribute to individually. It is not mandatory.
In addition to 403(b) options you may also have 457 and 401(a) options.
At retirement, all teachers, who qualify (by age, years of service, etc.), will receive a pension (the State of CT in my case) based on a specific set of criteria and formula.
Your 403(b) is totally separate from your state/municipal pension. I too contributed to my 403(b).
When you separate service you can roll over your 403(b). Another option is to annuitize your 403(b). I did both.
That's precisely why I am NOT in my state pension plan! My entire 403b is in a vanilla quality equity-only American Fund.
If you are a public school teacher I believe you are contributing to your state pension through monthly (payroll deductions) that are mandatory contributions to help fund the state pension fund. Your state also is required to contribute and often state's choose not to fully fund. Big problem when they don't.
Your 403(b) is an additional retirement option that you elect to contribute to individually. It is not mandatory.
In addition to 403(b) options you may also have 457 and 401(a) options.
At retirement, all teachers, who qualify (by age, years of service, etc.), will receive a pension (the State of CT in my case) based on a specific set of criteria and formula.
Your 403(b) is totally separate from your state/municipal pension. I too contributed to my 403(b).
When you separate service you can roll over your 403(b). Another option is to annuitize your 403(b). I did both.
Nope. As a university professor I had the option of selecting either the state pension or self-directed 403(b) - known as the Optional Retirement Plan - when hired. In my case the 403(b) contributions are pre-tax and 'above' my salary ... nothing I do or have touches the state pension system and I don't contribute to it myself. (Though pension and ORP folks alike can open up various pre- or post-tax 403b or 457b accounts as supplimental retirement accounts to save extra if we want.)
What you say is true for many K-12 teachers/staff in my state, but even then I believe they're also given the choice of either a traditional pension or ORP. But of course that varies by state and/or district.
Ran across this blog post from a law firm yesterday. As far as I know, and I'm willing to be schooled, margin debt in public markets is mostly a gamble by individual investors on specific companies. The description of margin debt in the linked post seems to me to indicate a different purpose.
Interest in “private” margin loans has grown as fund managers seek new ways to ease distribution bottlenecks that have constrained cash flows to investors. According to Bain & Co., private markets distributions as a percentage of NAV have fallen from an average of 29% between 2014-17 to 11% in 2024, the lowest rate in a decade.
Private margin loans have helped ease the pressure by unlocking debt capital, which fund managers can use to finance acquisitions or return capital to investors. The loans are secured against the equity stakes that the managers hold in the relevant portfolio companies.
snip
Interest from sponsors is growing, as many are still holding on to assets that they would rather not sell in the currently volatile environment. They are looking for ways to secure additional liquidity against those assets to fund follow-on investments and support their funds. Given these conditions, private margin loans are poised to become an increasingly popular financing option.
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.
“Private assets didn’t measurably improve pensions’ returns, says JP Aubry, associate director
of research at the Center for Retirement Research at Boston College, who conducted a study on them.
Before the financial crisis of 2008-09, they outperformed broad market, passive strategies slightly,
while they underperformed after.”
“Private assets might have a certain cachet, but public markets work just fine,
says Jason Kephart, senior principal, multi-asset manager research at Morningstar.
'People who have invested in public markets over the last 15 years have done well.'”
https://www.msn.com/en-us/money/economy/bitcoin-private-equity-and-other-alt-investments-are-coming-for-your-401-k-what-could-go-wrong/ar-AA1K77IJ
Your 403(b) is an additional retirement option that you elect to contribute to individually. It is not mandatory.
In addition to 403(b) options you may also have 457 and 401(a) options.
At retirement, all teachers, who qualify (by age, years of service, etc.), will receive a pension (the State of CT in my case) based on a specific set of criteria and formula.
Your 403(b) is totally separate from your state/municipal pension. I too contributed to my 403(b).
When you separate service you can roll over your 403(b). Another option is to annuitize your 403(b). I did both.
What you say is true for many K-12 teachers/staff in my state, but even then I believe they're also given the choice of either a traditional pension or ORP. But of course that varies by state and/or district.
Ran across this blog post from a law firm yesterday. As far as I know, and I'm willing to be schooled, margin debt in public markets is mostly a gamble by individual investors on specific companies. The description of margin debt in the linked post seems to me to indicate a different purpose. snip