What caught my eye this week.
Blogger 3652 Days has a great post up about why they’re shifting more of their money into private market investments, writing:
As a passive investor, I’m supposed to do nothing. Ideally forever. Also: I dislike thinking too much.
But public markets keep shrinking – fewer IPOs, more delistings, and an ever-increasing proportion of capitalism conducted behind NDAs and closed doors.
So, in a lapse of principle, I’ve been buying shares in listed private equity vehicles and management outfits – Oakley Capital Investments (OCI), Brookfield Corp (BN), and Blackstone (BX), to name a few.
This is the private equity exposure accessible without the $5 million minimum investment, a Cayman lawyer, and a relationship manager who calls you by first name and means it.
It is, admittedly, a semi-active decision. But then, so is breathing.
I’ve long identified the same trends in markets. For good or ill, as an active investor it’s a lot easier for me to shuffle some money into different pockets of the private space, whether it be through crowdfunded investments, or via some of the vehicles that 3652 Days discusses in their article.
But purely passive investors face a quandary with private markets. Investing widely in private companies is a very different proposition to buying into a basket of public companies via an index tracker.
Not only in the many technical ways that 3652 Days outlines. But also because by definition when you buy a private asset you cannot lean so much on the wisdom of the crowd (the public market) to assume you’re (usually) paying something like the appropriate price.
It’s a big existential divergence. It also potentially brings company analysis and fund manager skill back into the picture, which inevitably means higher fees.
No wonder the financial services industry likes private and alternative assets…
Fee-ver pitch
As I wrote recently for Moguls:
The fees on private funds are much higher than for cheap index funds. And as I explained above, private assets are always more opaque and illiquid.
Yet if we run the trend to stay/go private to its logical conclusion – and public markets continue to shrink – then we could all end up paying more in annual fees to hold much the same equity mix we once got cheaply via a tracker. And we’ll have far less idea about what we own and what it’s worth for the privilege.
Maybe this is what ultimately defeats the rise of indexing and passive investing?
The zero-sum maths of active investing in public stocks is irrefutable. So perhaps financial services simply changes the game instead.
A world where a huge proportion of our money goes into private market investments – and into the pockets of private managers – would be a step backwards for everyday investors.
Run to the logical conclusion, it’d mean we’d pay more for less transparent and likely less comprehensive diversification than we already get today from trackers. And yet with all that private money pooled into big pots, you’d not even have the fun of pursuing a 100-bagger.
We’re not there yet. We can still diversify widely via index funds. And it’s too soon to be sure that listed small caps are underperforming simply because the best start-ups are remaining private.
However the push to private (both in equity and debt) is for now the clear direction of travel. So take some time to read the roadmap at 3652 Days.
Have a great weekend!
From Monevator
Asset allocation rules of thumb – Monevator
Regular savings accounts for fun and profit – Monevator
From the archive-ator: They don’t tax free time – Monevator
News
Steeper productivity cut of £20bn makes tax rises more likely – Guardian
Reeves plans Budget council tax raid on expensive homes… [Paywall] – FT
…and is urged to cut pension tax-free lump sums to £100K – Telegraph via MSN
Nationwide: UK house prices ‘resilient’ – This Is Money
Santander boss urges intervention on car finance compensation – Guardian
Sky claims to have obtained Treasury’s definition of ‘working people’ – Sky
How deprived is your area? [Interactive tool] – Guardian
Amazon laying off 14,000 corporate workers as it invests in AI… – CNBC
…but is that what is really driving the job cuts? – BBC
Olive oil: not so much – This Is Money
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Barclays lowers mortgage costs as further rate cuts loom – This Is Money
Be wary of whiskey cask ‘investments’ – Which
Crypto funds price war erupts in UK [Paywall] – FT
Get up to £200 cashback when you open or switch to an Interactive Investor SIPP. Terms and fees apply, affiliate link. – Interactive Investor
Is a fixer-upper the best way to a dream home? – Guardian
Home insurance premiums are falling – This Is Money
Can you get the Chase Bank £100 switch offer? – Be Clever With Your Cash
Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley Direct through this affiliate link. Terms apply – Charles Stanley
Klarna launches new debit card and membership scheme – Which
Supermarket Christmas savings schemes – Be Clever With Your Cash
Does your motor and home insurance cover rodent damage? – Which
Stylish bungalows for sale, in pictures – Guardian
Comment and opinion
Beating the market is harder than you think – My Money Blog
The case for a good enough portfolio – Morningstar
Maybe it’s not a bubble… – FT
…but if it is a bubble, so what? – Brooklyn Investor
Trying to time the market is like playing The Traitors – Behavioural Investment
Jesse Livermore and the magnet of dancing stock prices – A.W.O.C.S.
If your job didn’t exist, would anybody miss it? – Klement on Investing
What true wealth looks like – The Atlantic
Regrets in ‘unretirement’ – Next Avenue
How to benefit from good advice – Contessa Capital
What’s going on with gold? – Of Dollars and Data
Art Laffer on UK’s economic woes [Podcast] – Merryn Talks Money via Spotify
The impacts of romantic relationships with the boss [Research] – via SSRN
Naughty corner: Active antics
Will attending an investment conference make you sad? – The Falling Knife
Size matters in factor investing – Alpha Architect
How consultants drove an asset allocation shift at pension funds – Verdad
Cryptocurrency as an asset class – Quantpedia
How does inflation impact trading? – Alpha Architect
A reading list for would-be traders (as opposed to investors) – Moontower
Kindle book bargains
Poor Charlie’s Almanack by Charlie Munger – £0.99 on Kindle
The Man Who Solved the Market by Gregory Zuckerman – £0.99 on Kindle
Chip War by Chris Miller – £0.99 on Kindle
Meltdown: The Collapse of Credit Suisse by Duncan Mavin – £0.99 on Kindle
Or pick up one of the all-time great investing classics – Monevator shop
Environmental factors
Insurers call for ancient trees to be felled as quick fix for subsidence – Guardian
Inventor up for award for tackling microplastics – BBC
Richest 0.1% in US emit 4,000x the carbon of world’s 10% poorest – Guardian
Coffee-driven deforestation is making it harder to grow coffee – NPR
Two crucial coral species left ‘functionally extinct’ by latest heatwave – Guardian
In memory of the Christmas Island shrew – Mongabay
Robot overlord roundup
Surviving the AI capex boom – Sparkline Capital
When your favourite bands new song is an AI fake – NPR
How Hudson River Trading actually uses AI [Podcast] – OddLots via Spotify
AI models may be developing a survival drive, researchers say – Guardian
When AI breaks bad [Paywall] – Wired
Current AI has no intelligence – The Register
Not at the dinner table
The cosmopolitan conservative [Paywall] – FT
Our hypocrisy blind spot – Behavioural Scientist [h/t Abnormal Returns]
Dating across the political divide in America – Cosmopolitan
After Trump, the deluge – Noahpinion
The US is a casino economy now. You’ll probably lose – New York Times
How Trump’s ballroom will dominate the White House – W.P. via MSN
Off our beat
Why we doubt ourselves – More To That
“I dressed up as a superhero for Halloween, then saved a life” – Guardian
Grokipedia is racist, transphobic, and loves Elon Musk – The Verge
Why you feel the cold more as you age – Independent
The decline of deviance – Experimental History
Could the Internet ever go offline? – Guardian
The country making orphanages obsolete – Reasons to be Cheerful
900,000 vs 9 – Seth Godin
And finally…
“Happiness is found in doing, not merely possessing.”
– Napoleon Hill, Think and Grow Rich
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Rather a sobering post on Humble Dollar today from Adam Grossman on the “perils” of private -in this case private equity investing with a concrete example
Maybe someone could provide a link?
xxd09
@xxdo9 – here you go
https://humbledollar.com/2025/11/lessons-from-first-brands/
This bit from the FT article on Reeves Budget plans was unexpected (band G here):
“A more targeted approach appears more likely. Among the simplest would be to simply double council tax rates on properties in the highest two existing bands, which could raise £4.2bn, according to the IFS.”
Went to have a look at the bands for all the properties in my postcode and spotted one of my neighbours shows as band F, everyone else is band G.
The calculators that estimate 1991 value from previous sold prices suggest the band F property is worth slightly more than ours, but both are closer to band H than band F, absolutely miles over the upper threshold for band F so I’ve no idea how they have managed that, property has not been extended/converted and is 100+ years old. Will keep that quiet for their sake!
For sure private market investments are the next in line for a giant financial scandal and/or crisis. It’s just a matter of when.
“A word on private”. Do VCTs have any bearing here or are they a completely different world?
Thanks for the mention, @TI — I won’t deny I’m flattered.
@some other commenters — For what it’s worth, I don’t think Jamie had private equity in mind in his cockroach speech. Both the First Brands and Tricolor episodes were more private credit than equity: factoring in the first case, asset-backed financing (with questionable collateral) in the second.
Neither structure is remotely new — factoring predates most spreadsheets, and as for the ABS angle… well, we’ve all seen that film before (2008, if memory serves).
That said, private equity does lean heavily on private credit, so if stress keeps building there, it can easily spill over — first into PE, then into public markets. The technical term is ‘systemic risk’. The colloquial one is ‘more cockroaches’.
The Swedroe article says you need to “Screen for quality when investing in small caps to avoid the junk that has historically dragged down performance.”
Are there any global small cap ETFs or funds that do that and are available to UK investors?
Otherwise, is he saying a world small cap ETF (eg WLDS) or world small cap value ETF (eg AVSG) is not suitable?
What an absolutely fabulous blog you’ve got @hosimpson. Love it. Don’t know how I’d missed it up to now, but I’ve really enjoyed reading through your posts there today.
Like others here, I’m a bit in the dark whether VCT / EIS / SEIS count properly (or at all) as “Private Markets”. Eye of the beholder perhaps?
Unless one has the risk appetite of a bungee jumper leaping off the Burj Khalifa; the tax breaks of those three venture capital relief schemes (the ‘VCS’) provide a much needed sedative to the inevitable anxiety of investing into such early stage businesses – many of which will return a big fat donut in returns.
I’ve got some minimal HVPE IT (and truly de minimis other listed PE ITs exposure) (along with doing a minimum SEIS investment two tax years now), but, as with the VCS, is PE really ‘full fat’ “Private Markets”? And is that term a label, a sign post or a definition?
How does one get the exposure if they are interested? There was a point where I had 10% PE in my SIPP, which was made up of HVPE, ICGT, HGT, and III and it was a faff. Are there any simple, one stop shops? Is something like IPRV actually the same as these various investment trusts?
@cm258 #9: IPRV ETF: AFAIK, there are no LSE listed UCITS £GBP denominated ETFs that give you *direct* exposure into PE investments, and this is actually an ETF of PE managers (e.g. Apollo and Brookfield etc), with a 0.75% OCF.
Another question which I have re: Private Markets, is what do they offer (in terms of empirically verifiable long term return history) over and above of investment into low liquidity listed micro caps (especially applying value and quality filters first); see this one for example:
https://open.substack.com/pub/dirtcheapstocks/p/case-study-debt-free-real-estate
@Index #7: I don’t think there are any.
@delta hedge — “Private markets” is, of course, a contradiction in terms — a bit like “affordable London flat” or “healthy spreadsheet addiction”. The word market implies price discovery in public, while private implies the exact opposite. But the industry likes the phrase because “illiquid bespoke bilateral investment vehicles” doesn’t test well in marketing surveys.
The alphabet soup of VCTs/EIS/SEIS are indeed private markets of a sort — just with HMRC as your co-investor and, occasionally, your saviour. The tax relief is less icing on the cake and more anaesthetic before the surgery.
From what I can tell reading this site, many fellow readers are already active participants in private credit — via peer-to-peer lending platforms. (Yes, that’s private credit. Surprise.) I personally dislike the stuff, but my list of objections is long enough to warrant its own twelve-part Netflix miniseries, so let’s agree it’s a matter of taste.
Private equity itself is, in my view, unindexable. Returns are massively stratified: the top decile of managers make money, the median ones make slide decks. The bottom half mostly exist to provide fee income for the GP and content for fundraising brochures.
There’s a “private market” for almost every public one — equity, credit, property, derivatives (OTC derivatives being the shadowy cousin of listed futures, so yes, private markets in a derivatives sense). All share one trait: illiquidity plus leverage, a heady cocktail best consumed by those who know which end of the glass is up. I’m only dabbling, and only with money I can afford to lose — hence, I’ve granted myself an exemption.
As for venture capital — I leave that to the professionals and the Dragons’ Den cosplay circuit. It’s not meant for dumb money (which, in my case, it definitely would be — it’s different for @TI, which explains why he’s been compounding double-digit returns into his second decade and I haven’t. Your mileage may vary, etc.).
Finally, if you want to understand the full risks of closed-end, leveraged investment trusts with illiquid underlying assets, look up MacarthurCook (MCK). It’s no longer listed, but the chart lives on — and if you can tell what happened just from that and the knowledge that the holdings were direct commercial property, you’ve earned your licence to dabble (with the money you can afford to lose):
https://www.intelligentinvestor.com.au/shares/asx-mck/macarthurcook-limited/share-price?page=25
Dan Neidle / Tax Policy Associates have done some analysis on the potential council tax hike I highlighted above from FT piece.
Kinda grim reading for those stuck in band G, he does indicate that he doesn’t think it would be fair to double council tax for all those in this band. (But…so…simple…gives me the revenues, my precioussss)
Obviously those at the lower end of band G would be fighting to get into band F, but it will inevitably mean that some people are paying c.£7k council tax a year, while their neighbour in a very similar property could be paying c.£3k
I’d much rather they overhauled the whole system so the curve was a lot smoother than that, reminds me of the old system of SDLT where you paid three times the rate on the full amount as the property value went over the £250k threshold.
If you’re going to fix council tax, do it properly. I’m paying way more tax after CGT rise last year, but I thought that was long overdue, no complaints. This proposal, I would be far less accepting of.
There’s a really great video here, which explained for me in very basic terms what the fundamental problems of private equity are including explicitly against listed companies.
You can see private equity being one of the next financial scandals as it has classic signs – opaque information, ill liquid assets, poor price discovery and they are now trying to open it up to the retail investor.
The Bubble No One Can Sell | Dan Rasmussen on the Private Equity Trap
https://youtu.be/q4Acn0doISw?si=AkwlCPjP3PD4nICQ
Cheers for coming in with the private equity explainers chaps (and agree that VCTs are private asset investment vehicles, the only quasi bit being they’re tradeable so you have ‘alt’ style liquidity, albeit at a cost of illiquid markets and discounts and so forth).
Re: Reeves and property taxes, at this point I think we just have to wait and see as I’m not sure there’s a combination that hasn’t been floated yet. (Seriously, we’ve had everything from stamp duty to council taxes to mansion taxes to CGT in the mix). As ever, like most people I’d rather a comprehensive simplification, albeit like most people I’m sure I’d moan at whatever bit would sting me the most.
Busy weekend. Shame we’re an anonymous blog as I’d love to share my Halloween fancy dress party get up! Then again maybe it’d be more scary than the next bear market or AGI imminent rumour. 😉
Happy Monday!
Interesting stuff – the narratives I’ve been reading recently have been the opposite e.g. Private Equity people desperate for exit liquidity, and so looking to Retail as a new market to dump it on.
But things aren’t binary, and of course there will always be some good ones, and the UK-listed space has been a reasonable hunting ground. I’ll always regret not holding on to my HG Capital shares from 10+ years ago, as it was always pretty much a no-brainer, such a quality team (Mercury AM such an impressive stable) & I think has outperformed the NASDAQ over time (though arguably Private Equity SHOULD, being inherently more risky).
I also get the ‘public markets are shrinking’ argument, though that may change if funding dries up in a downturn?
The BG vehicle Schiehallion has been interesting. The key flaw for me is that they held on to stuff once it IPOed – I get why they did it, but unfortunately given it has been a giddy time, plus some of the investments were questionable (trainers & spectacles…) then it would have been much better to sell at IPO which was usually the top. Anyway, that’s a separate discussion… on the other hand, as they’ve continued on, it’s not so bad for retail (-ish, it’s not very liquid & $-denominated) to be able to access Space X, Stripe, Bytedance, which do seem to be enduring (I know there are arguments about Stripe vs Adyen, though I suspect both can do OK).
@Jon Thanks for the Dan Rasmussen video, I hadn’t seen that one. Strong stuff.
Re: the prospects of private equity and the targeting of retail investors, in some cases as perhaps the patsies — well more than one thing can be true at once. 😉
I can’t speak for @HoSimpson but I think my article is pretty explicitly cynical about the downside of this push more generally (higher fees, more opacity, likely lower liquidity, etc).
As for the wider concerns about over-congested private equity funds left holding a baby, well absent an an AGI future that renders many of their holdings (e.g. cloud software plays) less relevant, I think everything is cyclical and while undoubtedly some assets will be ever hard to shift, in the end most of this stuff will get moved on, if only to trade buyers or management buyouts (albeit the later is another moving of the hot potato in some respects).
But with all that said, I do think it’s equally true that private markets are growing at the expense of listed markets. You can see it in the declining number of publicly-listed companies, even in the US, let alone the ever-shrinking ice cube that is the LSE.
To pick three big private companies that have scaled in recent years: OpenAI, Stripe, and SpaceX are together valued by private investors at over $1 trillion. In previous eras such rapid growth would almost certainly have required public money at a much earlier stage, and that would be seen in higher public market returns, especially for small/mid-caps which would have initially held these firms as they ascended.
It’s not all or nothing but it is a trend, at least for now, and something to watch for IMHO. Again, that doesn’t mean there won’t be blow-ups, mis-selling etc (in fact I’m sure there will be).
I hate it when people rubbish market timing, but that article on Trying to Time the Market is nonsense. The author rubbishes doing fundamental analysis. I guess he just wants everyone to buy an index fund and be done with it.
Just because some people can’t do something, doesn’t mean others can’t. Whether that is understanding financial statements, macro statistics or market timing, there is always an element of the risk of being wrong and that is what makes it fun and financially rewarding.
@kerry Most people aren’t day traders or trying to outperform the market. I think they do indeed want people to buy an index fund and be done with it.
Or at least to share the data shows that over the long term, the difference in returns between investing on the best days of the year (market lows) versus the worst days of the year (market highs) is minimal, provided the investor remains fully invested over the long term. The key takeaway from historical data is that “time in the market” is more important than “timing the market”.
Thanks for the article. On PE I own a bit of PIN and used to own Hg which I think is private credit.
I keep reading about ‘evergreen funds’ and the distinct impression is that the lack of an out for PE holdings means the industry is trying to offload onto retail punters. So if you put money into those you are funding those who want to leave and they’re the ones with info, not you.
Thanks for the links as always, I have a very long standing holding in SMT, which provides access to some private companies including SpaceX, totalling about 25% of the portfolio, and is relatively low cost.
I did read the guilty pleasure which was the Cosmopolitan link and wondered how these guys ever expect to find a partner in 2025, what woman would sign up to any of that?
Many thanks @tom_grlla for the insights.
I’d been seeing a few pieces over the past couple of years about PE ‘not working’ any more, for either LPs or the target firms (although, tbf, has PE buyout ever been anything but bad news, in aggregate, for the acquired businesses?)
They were generally along the lines that money in to money out type metrics (TVPI, DPI, RVPI and MOIC) were all down considerably on earlier vintages, whilst both fallback on continuation fund formation was up, and recent PME and IRRs looked bad.
I always remember a tale told by a former (now retired) colleague who, in an earlier professional life (over 30 years ago) had been a commercial lawyer working in a firm of accountants.
Back then he was part of a team tasked with the due diligence on a fund launch.
The fund, their client, was investing, IIRC, into something exotic like Latin American junior minors (or something like that, I heard this from him in the early 2010s, so my recollection of the finer details is now less than perfect).
He came to realise that the main driver for the fund launch was to give exit liquidity to early stage (equivalent to private market here) investors into said miners (or whatever it was).
Obviously, by that stage, all the surplus value (the actionable alpha) was long gone.
It’s the old dilemma of why would I want to be part of a ‘club’ (as, in effect, a private market vehicle ‘sells’ itself as) which would have (or even actively solicit) me as a member?
If PE (and, indeed, other types of private markets) are such a great investment, then why are the GPs ect suddenly willingly diluting their returns by making it available to the likes of me? Doesn’t Occam’s razor favour that the music stopped, and now they need to cash in their chips at my expense? 🙁
Okay … Look, I’m as proud of my tinfoil hat as the next person, but I have to draw a line at this whole “PE dumping on retail” narrative. Fun story, slightly misguided.
A closed-end PE trust can’t “offload” anything onto you just because its shares trade on the secondary market. They don’t even know you’re buying their shares. What’s more, lately these vehicles have actually been buying back their own stock, not raising new capital — which, if it’s meant as a dumping scheme, must be the least effective one ever devised.
Proper LP access (which does involve new money) requires seven- or eight-figure commitments and a qualified purchaser badge. The retail crowd can’t be fleeced here simply because they’re not rich enough to get through the door of the shearing shed. (If it were a shearing shed, which for the good PE houses it certainly isn’t, then even the bottom half are more likely to trip over their own incompetence than to be actively malicious.)
And as for IPOs — if floating a formerly private business counts as “dumping”, then Bill Gates mugged us all in ’86. Sometimes the sellers win, sometimes the punters do — that’s markets.
PE has its issues, but let’s not get carried away. Some of these guys are reducing their own floats through buybacks because their shares trade below NAV — the same logic Warren Buffett used when Berkshire bought back its stock. As an aside, Berkshire continues to invest in PE funds as an LP even while making headlines for selling listed stock … perhaps Warren has gone senile and is getting fleeced … I’d wager not.
So: deep breath in, deep breath out. Let’s untwist our knickers and carry on.
By the way, I’d missed the Cosmopolitan piece — thanks for flagging it, @larsen. An amusing but rather bleak read. The men oscillate between dangerous, deranged and merely pathetic, but the author doesn’t exactly emerge covered in glory either. By presenting herself as a potential romantic partner purely to study her matches like zoo exhibits (“behold the conservative male in his feeding enclosure”) for a magazine feature, she manages to dehumanise them while confirming every unflattering and unfair cliché about liberal, feminist, urban American women — cold, superior, judgy and serenely self-satisfied. One is almost impressed by the efficiency with which everyone involved makes themselves look bad. Smugly entertaining, perfectly tuned for clicks, and utterly useless for understanding.
@hosimpson — Isn’t the ‘PE is positioning to dump on retail’ narrative more at a structural level? As in, by pushing PE to wealth advisors and lobbying for retail access via changes in what various retail investment wrappers can hold, liquid alts, and even as we’ve seen in the UK encouraging governments to shepherd ordinary workers pension savings into PE, it is creating a new and substantial secondary market (/’dump’) for its over-stale holdings / new money to keep coming in to keep the show rolling?
I’m not saying with this comment whether that’s what’s happening in practice / it’s as bad as all that, but I think that’s more the story then secondary sales on irregular exchanges to retail punters or whatnot.
Re: Cosmopolitan piece, yes, more provocative than informative. I mostly included it as I was struck by how it took very everyday toxic online stuff out into the real, offline, world. I’d say it did go a little better than the same debates would have gone online — but only a little… :-/
@hosimpson Couldn’t disagree more. The finance industry has long history of corruption and downright malevolent practices. Of course closed-end PE trusts can raise capital from retail muggins like me (and more worryingly, institutions like my pension fund) and then hoover up all the private crap and bin ends out there, providing the exit liquidity for GPs. The question is not whether it is happening, but whether there are any honest operators in this “retail PE” space at all?
I couldn’t give two hoots if the LPs are getting fleeced, they already have more money than sense and only greed drives them to jump into PE with its information asymmetry. When my pension fund becomes an LP because of actions of my government, then it’s time to vote with my feet (and with my vote).
@TI — I see your structural angle. Though if we’re talking about suitability and matching investors to strategies, I’d have thought pension fund managers should have that covered (then again, given their track record, that may be optimistic).
As for Rachel Reeves’s “invest more in UK assets” line, my objection’s geographical rather than philosophical. Unlike the US, the UK is now a medium-sized (thanks, Brexit), open economy with a shrinking stock market. Home-focused investing feels less patriotic and more like self-harm.
My gripe with retail investors and PE, though, is the exact reverse of yours: retail isn’t being flooded with opportunity — it’s being fenced out. Scottish Widows can allocate some of your pension assets into PE via an LTAF for a 1.2% annual management fee — but try doing the same through your £10-a-month AJ Bell SIPP. You can lend £300 to Josh from Stoke-on-Benefits for a new iPhone via a peer-to-peer platform, but try finding a public subscription site for a 60-day bridging loan to a blue-chip arms manufacturer — mostly collateralised and, de facto, underwritten by an OECD government. No dice.
I’m reminded of that scene in movie Sabrina where the chauffeur quietly admits to having amassed millions by copying his boss’s Wall Street trades — “I bought when he bought, sold when he sold.” You’d think I could do that too, sitting front-row to some great deals structured by very clever people. Ha. Twenty years later, I’m still watching the same institutions invest millions — sometimes with my help, often very tax-efficiently — through structures I can’t touch, in vehicles I can’t access, while I’m paying a 47% marginal tax rate and sharing a retail shelf with Josh.
@baron – agree to disagree.
@hosimpson — Thanks for the further thoughts. Note though that you write:
To be clear I don’t think I have that particular implied gripe (a lowering of access barriers). (I do have some concerns about the push to private, on this and other aspects of P/E, but I see benefits too).
I was just articulating what the concern being widely articulated is, as I understand it. 🙂
As my original article above noted, I’ve been exploring PE for various reasons in various flavours for many years now, and I can see an ongoing need to have exposure to more of it, for good or ill more broadly.
Perhaps I’m being a bit pedantic here, but as blog owner / future person to have a finger pointed out, just wanted to make my position a bit clearer.
While we are looking at slightly more complex instruments, I would be interested to know if anyone has managed to buy one of the newly-approved Bitcoin ETFs within an ISA. Although AJBell and iWeb list them, they are shown as not eligible. I have passed their competence test. I have an aversion to paperwork and apps where money is concerned, one of the joys of ISAs.
@onedrew Yes I bought WXBT on T212.
@hosimpson, @tom_grlla, @TI: what do you each think about the argument that PE has already had it’s time in the sun in the era of (seemingly, for its duration) ‘perpetually falling’ rates (circa 1981 to 2020/21); and that, without access to a tidal wave of cheap debt in future, it can’t ‘work’ anymore?
I like to think of myself as distinctly not of the Javier Milei persuasion, but even a Kenysian like me can’t now see anything beyond endless deficits and unrelenting pressure on bond prices, leading to structurally higher long term rates (especially with the shrinking tax base, and ever increasing demands of pension and health spending with demographic transition).
How many of the pre 2020 vintage PE deals would fall through if (in the foreseeable future) 30 year nominal Treasury Bonds were at 6%, 7% or even 8%, and long dated TIPS had hit 3%, or even 4%, real yields?
Given that the official projection (assuming, unfortunately and unrealistically, no deep recessions, no future pandemic responses and no war with China over the next 30 years) is for the US national debt (federal only) to go from $38 Tn now to (at current prices) $150 Tn in 2055 (at which point, it’s then projected to be 267% of GDP, more or less the same level as Japan’s now); isn’t any model, such as PE has/does, that relies heavily upon cheap debt going to become at serious risk, given that T-Bill rates are the floor on lending at equivalent durations?
Re: Private equity and retail, from the FT yesterday:
https://www.ft.com/content/96e3dc95-dbb4-4de0-8893-ce597e58b5d3
Years ago I took my cue on how to allocate to “private markets” from one of the founding partners of the biggest European leveraged buyout shop. His advice (and what he said he did personally) was just own the listed equity of APO, BX, KKR and ARES. Albeit important to note they were trading materially cheaper back then.
Makes sense to me in principle though, why pay the fees to be an LP with no liquidity when you can be exposed to the asset class but fully liquid and on the receiving end of the fees. The higher liquidity and hence higher volatility of liquid shares shouldn’t be confused with higher risk than an illiquid LP stake in a fund.
Obviously the economics of how carry is apportioned between shareholders and deal teams matters greatly, there’s a balance between share of the rewards versus the company being able to attract and retain the best people. As @hosimpson rightly points out PE is an industry where quality matters enormously, there are a select few winners with a repeatable model for creating value and a long tail of mediocrity that is much more reliant on low cost leverage to succeed.
I also agree that PE’s focus on targeting retail / retirement money isn’t really to do with exit liquidity for existing investments, it’s just an attractive source of funding. Those retail vehicles are perpetual capital and attract higher fees than traditional funds with institutional LPs. Again, it’s better to invest in Blackstone than in BREIT.
@Delta hedge – If I thought PE’s best days were behind it, I wouldn’t be allocating there.
@AoI – On the evergreens: my main objections are the fees (as you note) and the duration mismatch. Long-term, illiquid assets funded with shorter-term capital feels like a rerun of a story we’ve all seen before … something involving a bank and some sort of rock. Southern Boulder? Eastern Pebble? The name escapes me. Anyway, it worked beautifully right up until it didn’t. I know they manage capital carefully and keep liquidity buffers, and the institutionals, endowments, family offices, etc. that invest in them are less likely to panic in a crisis, but still — why take any extra risk and pay extra fees for the privilege?
I get that continuous capital deployment smooths the j-curve, but I’ve always thought the j-curve was part of the deal; a feature, not a bug. And all that additional liquidity and capital-management and pricing machinery doesn’t come cheap; you pay for it in higher fees, as you mentioned.
Personally, I’ll stick with the managers (for the reasons you outlined) plus a couple of solid closed-end listed trusts — ideally with conservative leverage and European exposure, where PE arguably really earns its keep given the Continent’s lesser reliance on public equity markets. The listing provides genuine secondary liquidity, which never hurts, although with PE (listed or otherwise) you should be in it for the long haul.
Anyway, that’s my 1.53 pence (at the current exchange rate). I might be wrong, of course, wouldn’t be the first time 😉
More information on this area from Howard Mark’s latest Memo entitled “Cockroaches in the Coal Mine”:
https://www.oaktreecapital.com/insights/memo/cockroaches-in-the-coal-mine
Very interesting -supping with a long spoon required!
xxd09
There’s a reason private markets are being pushed on to retail investors, and it’s not a good one. PE vehicles are struggling to realise their value and exit investments. The easy solution? Sell it to the next fool.
I’m not convinced on private markets offering greater returns (especially post fees) whether that’s through ‘differentiated sourcing’, ‘operational excellence’ or ‘upside convexity’ to use some of the buzzwords. Or that private markets offer a different type of exposure vs public markets that you should be exposed to.
To take one example, if the argument is PE can find opportunities that are more likely to be mispriced due to lower transparency in private markets – that doesn’t really work in practice as PE are all knocking on the same doors and it’s rare that a company being sold won’t run a sale process which forces a ‘market clearing’ price.
Moonfare gives you access to funds as an LP via a feeder fund with €50k minimum but the fees are high (1% entry, 0.8% pa on top of underlying fund). It’s worth signing up just to get the fund marketing docs.
Would highly recommend the three part series “The Tyranny of IRR: A Reality Check on Private Market Returns” on CFA Institute website.
Bain also has a good annual Global Private Equity report.