Delusional expectations of private equity investors

The Globe & Mail has a brief story on the high expectations of private equity investors (refer to the article for the link to the study):
With returns in other asset classes depressed, almost two-thirds of investors surveyed by research firm Preqin say they expect private equity managers to post returns that trump public markets by at least 4.1 percentage points. Three years ago, that number was 17 per cent.

A further 23 per cent in the latest survey said they expected at least 2.1 percentage points over public markets returns.

Given what some studies have shown, that seems a lot to ask.

A recent study by London Business School Professor Chris Higson concluded that investors get "at best a market return."

Mr. Higson looked at returns from 1980 to 2005. His conclusion was that only about a quarter of funds outperformed, while the rest underperformed.
The survey appears to have sampled over 100 private equity investors—sample size is reasonable—and it seems many have rose-coloured glasses. Beating the market by 4.1% in one year, which is what the study is quoted as saying, is within reach; but if investors are expecting private equity to beat the market by 4.1% in the long run, forget about it. They would be lucky to beat the market by 1% in the long run.

Comments

  1. AnonymousDecember 17, 2010 at 4:45 AM

    Returns that investors seek from this part of their portfolio is a reflection of the risk that they feel it brings. In order to make it wrth investing, they must be getting returns in excess of 4% as they are seeing PE as high risk right now. It's not saying that these investors are expecting their existing portfolios to achieve this right now. The fact that fundraising has pretty much collapsed in 2010 is a reflection of the fact that investors are not confident that they can find funds which will give them this kind of return. If it was a reflection of how great PE investors thought PE was, then fundraising would be through the roof!

    ReplyDelete

Post a Comment

Popular Posts

Thoughts on the stock market - March 2020

Image
Right now, DJIA has a P/E of 16.8 and forwand P/E of 15.1, whereas S&P 500 is at 20.1 with forward P/E of 15.8. Source: WSJ market Data If you ignore interest rates and inflation expectations--both of these influence valuations but depends on your macro call-- the market is not cheap. Long-term P/E is around 15. Trailing P/E is around 20% (Dow) to 40% (S&P500) higher than average. Forward P/E is in line with long term average but that assumes a strong V recovery. Consensus forecast is for profits to drop 1.2% in 2020. In 2008, it dropped 25.4% so current forecast is a very mild recession. Covid-19 coronavirus is not going to last more than a few months but these forecasts are still too rosy in my opinion. So I wouldn't rely on forward P/E. The richly valued (mostly tech or high quality) have not fallen much but the distressed ones have. So if you want to outperform in the long run, I think one’s choice right now is to: • Wait for market to fall another, say
✖ READ MORE >>>

Warren Buffett's Evolution and his Three Investment Styles

Image
A Young Warren Buffett In a comment to one of my posts , Mark Carter, who incidentally appears to have a  good blog worth checking out , asked: "Buffett Prime is 1970's to early 1990's" Could you elaborate? I have vaguely indicated how I view Warren Buffett in the past, but I thought I would detail my view of his investing behaviour. This is more of an opinion piece and many others would disagree with me (if you do, I'm curious to hear your thoughts). I don't follow Warren Buffett as closely as many value investors so I may get some facts wrong. My view is that Warren Buffett went through three different phases, with each consisting of different investment techniques. The overall investment theory remained the same—what people call value investing—but his execution, tactics, and strategy differs across the three phases. Some people may break up his career into additional periods but my feeling is that the three I will describe essentially capt
✖ READ MORE >>>

Hugh Hendry discussion at the Alternative Investment Conference

Thanks to Value Investing World for bringing this Hugh Hendry interview to my attention. I may not agree with all the things—short-term orientation of hedge funds is actually worse IMO; the sharp pencil effect doesn't always work—but Hendry is a true contrarian and worth listening. Like Marc Faber or Jim Rogers, you also can't take everything Hugh Hendry says seriously. I had always felt Hugh Hendry was firmly in the deflation camp but I get the feeling that he is now opening up to high-inflation possibilities. Otherwise, his stance appears to be similar to past opinions.
✖ READ MORE >>>