Smart Money Monitors Private Equity Costs


November 14, 2013

The big US endowment funds, those of Yale University and Harvard University in particular, are considered the benchmarks for patient, smart, long-term investment, according to Forbes, so when Yale’s Endowment team made a decision to reduce its allocation to private equity from 35% of its portfolio to 31% of the portfolio (which is still a hefty stake in PE), the magazine took note and did a bit of investigative reporting.


The article describes recent investment activity of endowments and sovereign wealth funds in alternative assets. The conclusion was that the smart money appears to still like private equity, but are keeping a close eye on whether they are getting sufficient return for the illiquidity involved. The smart money apparently “mistrusts” hedge funds; and “loves” infrastructure funds.


One of the chief criticisms is the illiquidity of private equity and the fact that there is not much of a discount because of it. These careful investors will no doubt be awaiting the finalizing of an academic study that was announced this week. Barrons wrote about it here. The internationally-authored study investigates whether the performance of private equity investments is sufficient to LPs for risk, long-term illiquidity, and management and incentive fees charged by the general partner.


Initial findings were that “management fees, carried interest and illiquidity are costly, and GPs must generate substantial alpha to compensate LPs for bearing these costs”. In other words, LPs have to be very good at selecting GPs and at the same time be meticulous about monitoring the costs of PE investments. (Image source: Yale Endowment website)

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