In The Wall Street Journal, Jason Zweig tells the story of Calpers, the nation’s largest pension fund, and the nation’s growing investments in private equity. Like Calpers, many pensions are hoping to meet unrealistic return expectations (something I have written about many times, including here, here, here, and here) by investing in private equity. The problem is, it isn’t a sure bet that private equity will be able to produce the returns necessary. Zweig writes:
Still, the future for private equity might not be as lucrative as the past, with money gushing in and with buyouts priced near their highest levels in the past decade and a half.
“Now, when everyone else is doing it and with [the prices of buyout deals] higher, expected returns look just okay,” says Steven Kaplan, a finance professor at the University of Chicago Booth School of Business.
Proponents say private equity’s outperformance comes from skilled managers who buy companies at attractive prices, improve operations, crank up returns with borrowed money and then sell at even more attractive prices.
Skeptics say the outperformance comes from using debt to invest in companies that are somewhat smaller and cheaper than average—which you could do yourself, at a fraction of the cost, by using borrowed money to buy an exchange-traded fund.
In a blog post last September, investment advisers Preston McSwain, managing partner of Fiduciary Wealth Partners in Boston, and Wesley Gray, founder of Alpha Architect in Broomall, Pa., posted a wager.
They offered to bet up to $1,000 that, over the next 15 years, a basket of the 10 largest private-equity funds of 2018 won’t outperform the stone-simple, dirt-cheap Vanguard Extended Market exchange-traded fund (purchased with 50% borrowed money).
So far, no takers.
Read more here.
E.J. Smith - Your Survival Guy
Latest posts by E.J. Smith - Your Survival Guy (see all)
- Stop America’s Zombie Apocalypse before It Starts - December 1, 2023
- Survive and Thrive November 2023: A Word or Two about Your Survival Guy’s Money - December 1, 2023
- Small Government Just Works - December 1, 2023
- Locking In a Generational Opportunity in Fixed Income - November 30, 2023
- RIP Charlie Munger: Keeping It Simple Never Goes out of Style - November 30, 2023