Jul 21, 2022
If you have any interest in private equity or have thought about
it as an asset class, then this episode is for you! What is private
equity? This might seem a simple question but the answer is more
complex than you think. Private equity is a nuanced subject that
requires a deep understanding to make successful investments. To
help unpack this non-trivial subject is expert Ludovic Phalippou, a
Professor of Financial Economics at the University of Oxford Saïd
Business School. Although he studied economics in general, his
research mainly focuses on unravelling the complexities of private
equity. He has written many papers on the topic, including a book
called Private Equity Laid Bare. He has a
Masters in Economics and a Masters in Mathematical Finance from the
University of Southern California and a Ph.D. in Finance from
INSEAD, making him well versed in the subject. Besides his
impressive qualifications and experience, his insight and ability
to speak to the data make him stand out from other experts. In our
conversation, we get into the basics of private equity and what
makes it attractive to investors. During our conversation we
discuss the challenges for measuring performance, how to best
measure the performance of private equity funds, the different
facets associated with private equity, how to tell if certain
private equities are a good investment, and the differences between
private and public equity. We also hear how it is applied as he
walks us through some real-world scenarios and gives us some
insider knowledge on the best private equity options. As you will
hear from our conversation, there is no easy answer!
Key Points From This Episode:
- We learn what asset classes are included in the broad term of
private equity. [0:03:39]
- The end-to-end process for investing in a typical private
equity fund. [0:06:49]
- The challenges with measuring the performance of private equity
- How investments that have not yet been sold are treated when a
manager is reporting on their performance.
- Professor Phalippou explains how well the IRR captures the
economic results delivered by a fund.
- Whether there are alternative approaches to evaluating
- A discussion about the typical characteristics of a buyout
- The best approach for evaluating your private equity.
- Find out if a public equity benchmark has to be adjusted for
leverage, regarding buyouts. [0:24:26]
- We learn about the fees that private equity limited partners
typically pay. [0:26:34]
- Outline of the less obvious fees that limited partners might be
- Whether an investor paying carry is a sign that the investment
has done well. [0:31:07]
- Comparison of private equity performance relative to public
- What number Professor Phalippou would assign on an expected
return to private equity, as an asset class.
- How successful investing in private equity has been for
institutional investors. [0:39:32]
- The performance of Blackstone and KKR is discussed relative to
an average private equity fund. [0:42:11]
- We get details about the Yale situation and how it manifested.
- Reasons why private equity is regarded as the best performing
asset class for institutions. [0:45:32]
- Professor Phalippou tells us if he thinks private equity offers
diversification benefits to a public equity portfolio.
- He discusses a recent case study regarding Hilton.
- Why he thinks sophisticated investors are allocating funds to
private equity. [0:48:14]
- Professor Phalippou shares how to be successful when investing
in private equity. [0:50:00]
- Whether the returns of private equity can be replicated in
public equity. [0:53:09]
- How Professor Phalippou defines success.
- We end the show by finding out if the value premium is
risk-based or behaviour-based. [0:55:35]