5/20/17…

As someone who’s invested, directly and as a fiduciary, in a small way, in private equity, I found this interesting. But I think it misses or slides by a couple of important points. First, it really is difficult to know exactly what the returns have been, especially if your PE investment was made just before the crash, in 2007 and early 2008, as the ones I’m familiar with were.  PE sponsors tend to report returns on a position-by-position basis. This exaggerates “IRR” since it features the good stuff only. I think the only way one can get any idea of how well one’s doing is by applying the hoary test of “cash in, cash out.” As a given fund approaches its winding-up, as the ones with which I’m familiar are, the lines representing what the fund’s telling you its IRR has been, and what your own eyes and common sense are telling you, will tend to converge. Only then can you really get an idea of how well or badly you’ve done. It’s all rather like that game of “Battleship” that many of us played when young, where opponents each have a sheet of graph paper on which they deploy their flotillas by filling in squares, five squares for a battleship, four squares for a heavy cruiser and so on down to one square for a submarine. The cheat who “keeps his submarine in his pencil” always wins. So it is with much PE accounting: reported IRR will always include sponsor valuations of stuff that’s still on the balance sheet, illiquid. Second, and to my mind, most important, is the fact that the real money for PE sponsors is in the 2% fee on AUM. This encourages a focus on size, often leading to an asset pool too large to deploy in the moderate-sized investments that generally offer flexibility and the prospect of decent returns, and a commitment to investments possibly beyond the intellectual grasp of the sponsor.  In a word, “Where are the customers’ McMansions?” In every generation, there is a prophet who carries all before him. Long decades ago, it was McGeorge Bundy at the Ford Foundation with his “total return” (operating money sourced from capital gains should be considered the equivalent of money sourced from dividends and interest and spent freely). The investment/endowment >T>T> Baptist of this generation has been David Swensen at Yale, the outspoken advocate of PE – or “alternative investments” as the category is known.  Maybe he has done as well as is claimed with Yale’s heavy emphasis on alternatives, maybe he hasn’t. As the man says, “Don’t count yo’ chickens until they is hatched.” http://www.nakedcapitalism.com/2017/05/private-equitys-lousy-governance.html

This is Naked Capitalism‘s “must read” for today. It’s an excellent example of description without prescription – and there’s nothing wrong with that, if the analysis takes into account the complexity of human affairs, as the writer certainly does, and what he describes seems in touch and in tune with real life. https://newleftreview.org/II/104/wolfgang-streeck-the-return-of-the-repressed

I’m reposting this from yesterday, since it fits nicely with my notion that a great problem of today is “the over-empowerment of the young” thanks to technology. http://www.nakedcapitalism.com/2017/05/notes-from-an-emergency.html

My friend Marina sends this, a NYT interview with a founder of Twitter in which he deplores the state of the internet. https://nyti.ms/2rCy0Vf A quote from the piece perfectly illustrates “the tyranny of the algorithm”: The trouble with the internet, Mr. Williams says, is that it rewards extremes. Say you’re driving down the road and see a car crash. Of course you look. Everyone looks. The internet interprets behavior like this to mean everyone is asking for car crashes, so it tries to supply them.” Pure “Quantativity,” to coin a word.

 

 

 

 

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