Is There a Relationship Between Private Market Valuation and Returns?

The valuation gap between private equities, an the s and p 500 has declined over the period 19 98 through september two thousand 18. Now they also document that there's a significant relationshipn on't know, significance may be not the right word. So when valuations are the same, for example, you might not expect as much, or any, premium, from private equities. And again, we have valuations increasing, which drives down expected returns.

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The type of assets which usually come to mind when considering investments are stocks, bonds, or cash, but what are the alternatives? And what kind of returns do alternative asset classes offer? In today’s episode, we delve into the returns which can be expected from alternative asset classes such as private equity, venture capital, angel investing, private credit, hedge funds, direct real estate, and cryptocurrencies. Hear an in-depth analysis based on empirical studies and the expertise of your hosts, Ben and Cameron, to discover whether there is any merit to alternative asset classes as investments. We unpack the extra layer of complexity associated with predicting returns on alternative assets, how to approach calculating returns, and why the associated fees are an essential consideration. We also hear details about an interesting conference Cameron recently attended and briefly recap cryptocurrencies as an investment. You’ll also hear our conversation with our 22 in 22 reading challenge guest David Senra about his reading habits, the books that most inspire him, and his advice for people who want to read more.

Key Points From This Episode:

Outline of today’s main topic: expected returns for alternative asset classes. (0:01:51)
Why predicting returns of alternative asset classes has an extra layer of complexity. (0:03:18)
How to approach estimating the returns of private equity, specifically buyouts. (0:05:04)
We unpack historical data regarding the returns of private equity. (0:07:35)
Calculating the returns on venture capital and reasons to be cautious about it as an asset class. (0:16:35)
The distribution of returns from venture capital based on the market numbers. (0:20:09)
Learn what angel investing is and its associated returns. (0:20:54)
What returns on angel investing are most dependent on and why. (0:22:21)
The different types and the associated returns. (0:25:23)
Hear about the fees associated with private credit. (0:27:42)
We unravel the concept of hedge funds, the associated fees, and expected returns. (0:29:29)
A limiting factor on hedge funds: capacity constraints. (0:33:38)
The takeaway regarding private real estate investments. (0:36:25)
How private real estate is valued as an asset class. (0:37:48)
Cryptocurrencies and the returns to be expected. (0:39:34)
We discuss some of the key takeaways from today’s main topic. (0:43:30)
We follow up on a previous topic we covered: financial literacy. (0:45:10)
Find out about an interesting conference that Cameron recently attended. (0:48:46)
Hear about the recent reviews we have received about the podcast. (0:57:58)
We introduce our 22 and 22 reading challenge guest, David Senra. (01:00:15)
Where David’s passion for reading about founders originates from. (01:02:25)
David shares details about his reading habits. (01:05:57)
His approach to finding founders that he wants to read about. (01:08:49)
David’s approach to note taking while reading a book. (01:11:07)
We learn about the stories that have impacted David the most. (01:13:53)
He explains the benefits of reading a book for a second time. (01:17:11)
Books about founders that he thinks everyone should read. (01:19:20)
David’s observation of the role of luck in a founder’s success story. (01:23:19)
Advice he has for people who want to read more. (01:29:33)

Links From Today’s Episode:

AQR Capital Management — https://www.aqr.com/

BlackRock Asset Management — https://www.blackrock.com

Bank of America — https://www.bankofamerica.com/

‘The risk and return of venture capital’ — https://www.sciencedirect.com/science/article/pii/S0304405X04001564

‘Performance of Private Credit Funds: A First Look' — https://jai.pm-research.com/content/21/2/31.short

‘Do Hedge Funds Hedge?’ — https://jpm.pm-research.com/content/28/1/6.short

‘The Performance of Hedge Fund Performance Fees’ — https://www.nber.org/papers/w27454

‘Higher risk, lower returns: What hedge fund investors really earn’ — https://www.sciencedirect.com/science/article/abs/pii/S0304405X1100016X

‘Another Look at Private Real Estate Returns by Strategy’ — https://jpm.pm-research.com/content/45/7/95/tab-pdf-trialist

'The Characteristics and Portfolio Behavior of Bitcoin Investors: Evidence from Indirect Cryptocurrency Investments' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3501549

‘Beliefs and the Disposition Effect’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3516567

‘Once Bitten, Twice Shy: The Power of Personal Experiences in Risk Taking’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2506627

S&P Global FinLit Survey — https://gflec.org/initiatives/sp-global-finlit-survey/

Future Proof Conference — https://futureproof.advisorcircle.com/

Invest Like the Best Podcast — https://investlikethebest.libsyn.com/

David Senra on LinkedIn — https://www.linkedin.com/in/david-senra-278843236/

David Senra on Twitter — https://twitter.com/FoundersPodcast?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Eauthor

David Senra on Facebook — https://www.facebook.com/david.senra.1

The Founders Podcast — https://founders.simplecast.com/

A Triumph of Genius — https://www.amazon.com/Triumph-Genius-Edwin-Polaroid-Patent/dp/1627227695

Cable Cowboy — https://www.amazon.com/Cable-Cowboy-Malone-Modern-Business/

Titan — https://www.amazon.com/Rare-Chernow-Titan-Life-Rockefeller/