The Challenges of Measuring the Performance of Private Equity Managers

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 managers. [0:09:48]
• How investments that have not yet been sold are treated when a manager is reporting on their performance. [0:12:48]
• Professor Phalippou explains how well the IRR captures the economic results delivered by a fund. [0:14:04]
• Whether there are alternative approaches to evaluating performance. [0:17:52]
• A discussion about the typical characteristics of a buyout fund. [0:19:35]
• The best approach for evaluating your private equity. [0:21:24]
• 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 paying. [0:28:11]
• 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 equities. [0:32:31]
• What number Professor Phalippou would assign on an expected return to private equity, as an asset class. [0:38:46]
• 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. [0:44:24]
• 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. [0:46:01]
• He discusses a recent case study regarding Hilton. [0:47:11]
• 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. [0:55:18]
• We end the show by finding out if the value premium is risk-based or behaviour-based. [0:55:35]