Tuesday, April 24, 2007
The FT has a very nice special section today on private equity accessible here. The special opens with the results of a poll carried out on the FT’s behalf, which found that the industry is poorly understood by the majority of people in Europe’s five biggest economies. For example, 62 per cent of people are “not at all familiar” with private equity. In another good, short article, Josh Lerner of the Harvard Business School reviews the results of recent studies which have found that when you adjust private equity returns for their high leverage, these investments actually underperform the market on average.
For those who are interested, the two main papers Lerner cites to are:
Steven N.Kaplan & Antoinette Schoar, Private Equity Performance: Returns, Persistence and Capital Flows, Journal of Finance (Aug. 2005) a draft of which is available here.
Phalippou, Ludovic & Gottschalg, Oliver, Performance of Private Equity Funds (March 2007).
The real question, of course, is why is there such a flight to private equity today in light of these sub-standard returns? My guess is a species of the winner-take-all effect. A few of the better organized and larger funds are significantly out-performing the market (witness Blackstone's now disclosed superior returns). These leaders incentivize investors chasing outsize returns in a global capital glut to stay with private equity. I hope they choose well.