Welcome to another episode of the Rational Reminder Podcast. In today’s jam-packed episode, hear updates regarding our goals survey, the schedule for upcoming guests on the show, the latest news and highlights from the financial world, and some of the feedback we have received about the show. We also highlight interesting articles and papers regarding tech valuations, expected stock returns, the performance of venture capital funds, and a book recommendation that will help you understand the finance game. Tune in to learn about the results of the recent social survey in Canada, the basics of private equity funds, the challenges of calculating the Internal Rate of Returns for investors, some of the misconceptions surrounding private equity, and much more!
Key Points From This Episode:
We start the show with an exciting announcement for our listeners. [0:02:07]
An update regarding the Goals Survey Project and what needs to be done. [0:03:30]
A rundown of the upcoming guests for the show. [0:04:44]
Outline of the reviews and criticisms received about the show. [0:05:55]
A breakdown of the book for today’s review, Finite and Infinite Games. [0:10:07]
Background about the author of the book, James P. Carse. [0:10:57]
The main point of the book: the differences between finite and infinite games. [0:11:16]
An interesting quote from the book regarding culture. [0:14:42]
Highlights of the recent news and updates in the financial world. [0:17:02]
Insights from an interesting article about tech valuations by Cliff Asness. [0:19:47]
Another interesting paper by David Blitz about expected stock returns. [0:23:09]
A discussion regarding the recent social survey implemented in Canada. [0:26:07]
We discuss the basics of private equity as an investment strategy. [0:30:06]
Why the math used is problematic for calculating the Internal Rate of Return. [0:32:35]
The results of a paper which investigated the performance of venture capital funds. [0:39:01]
More insights from follow-up papers about private equity. [0:42:24]
Examples of the type of risk exposures that private equity provides. [0:49:36]
The impacts associated with the preference for illiquid assets. [0:52:00]
Some of the misconceptions surrounding diversity in private equity funds. [0:52:44]
What are the best metrics to use to measure returns on private equity. [0:56:00]
Read the Transcript:
Ben Felix: This is The Rational Reminder podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital.
Cameron Passmore: So let's get something important off the table right up front here. Can you hear Oscar snoring?
Ben Felix: No.
Cameron Passmore: So Oscar's at my feet as many people know, and he just laid down and in a matter of seconds, he's snoring like crazy. It's unreal.
Ben Felix: Oh, good for him. I'm jealous.
Cameron Passmore: So I guess it's a testament to how good these mics are to not pick it up. So you live in the country now. Have you been out kayaking at all yet?
Ben Felix: Yeah, I've been out a few times. I've been also hiking a lot.
Cameron Passmore: So no regrets, obviously.
Ben Felix: No. I go for probably an hour and a half walk in the forest every evening.
Cameron Passmore: That's awesome. So we discovered flipping around in the weekend just for some recent content, we found a Canadian show that's pretty entertaining to watch. It's called Hoarder House Flippers. Have you heard of this?
Ben Felix: No.
Cameron Passmore: So I know many people have watched this show. I think it's called Hoarders, which is quite sad because there's all kinds of issues why people might be hoarders, but this is about people that buy the houses that were owned by hoarders. They pay incredibly little for these houses. They have to go in and it's basically empty then and then find out what you really bought because you don't really get a chance to inspect them. So you watch a couple episodes and it's a Canadian show.
In fact, the last episode we watched was from Sainte-Sophie, which I think is north of Montreal, but it's cool to watch Canadians doing this and going to the stores that you and I go to. It's quite entertaining, actually. It's on Prime, Amazon Prime. So if you remember something light and you want to feel good about your house, the way it is now, you watch this. Oh, the rotten basement floors and the foundations and the stuff they discover is unreal.
Ben Felix: Yikes. I don't want to watch that.
Cameron Passmore: Well, you're not a big TV watcher. We were just flipping around killing some time on the weekend. Okay. Let's move on.
Ben Felix: So we're excited to announce that we've lowered our asset minimum from $2 million down to one million just because we've been working really hard on internal efficiencies and well, that's it. So now we were able to lower that threshold. Again, people know we don't like to use the podcast as a sales platform, but it's important information because it makes our services more accessible to more people, which is important to us.
Cameron Passmore: Agree.
Ben Felix: The other thing I wanted to mention is that we've been doing talks at mostly one large Canadian company for the last, jeez, six or seven years now where we go in and speak to groups of employees about financial wellness and index funds and all that good stuff, but based on all the happiness research that we've been doing, we've overhauled, rebuilt that talk, and we've got our financial planners that are continuing to give it to groups, but we wanted to offer to the podcast community, to people in Canada because it is a Canada-specific presentation. People in Canada, if you're interested in having a PWL financial planner give this talk on funding and funding a good life, so it's got the happiness component, but it's also got the Y index funds make sense component, yeah. So if anybody's interested in having that talk delivered, we're more than happy to supply a person to deliver it, no strings attached or anything. Just let us know.
Cameron Passmore: Exactly. You want to talk about the goal survey, give an update on that project.
Ben Felix: Oh, yeah. So we've collected over 200 responses to the goal survey, which is unreal. I mean that was a stretch goal that I had in the back of my mind and we want to start working with the data, but the problem is that we're like our audience, our podcast audience, we know this from past surveys, our responses are massively skewed toward males.
So before we start working with the data, and we're actually thinking about asking some of the academics with relevant fields of study to help us, once we have what we feel is a good set of data but not super comfortable doing that when it's 95% male respondents, it's not exactly a representative dataset to work with. So my ask is if you have filled out the survey, if you're a male and have filled out the survey, if you could ask a woman in your life to also fill out the survey, that would be hugely helpful to hopefully get that male skew down.
Then likewise, if you're a woman and have not filled out the survey and are listening, then please do it. It would help. It would help a lot. So we'll put a link to the survey in the show notes and on all of our social platforms and stuff so people can find it.
Cameron Passmore: Awesome. That's great. Upcoming guest next week, Vanessa Bohns is here. She wrote the book, You Have More Influence Than You Think. In two weeks, our very good friend and past guest, Dan Soland joins us for the 22 in 22 reading challenge, and he'll have a bit of reading inspiration for you. In three weeks, Rebecca Walker will be here. She wrote the book, Woman Talk Money. In five weeks, we changed up the order here, in five weeks, we'll be welcoming Ludovic Phalippou, is that how you pronounce it, who is a professor of financial economics at the University of Oxford Saïd Business School. So that's interesting that get right there, Ben.
Ben Felix: Yeah. Well, he's going to be great. He's very passionate about his research, which is largely focused on private equity. We're actually going to talk about some of his research later in this episode. Yup. Should be good.
Cameron Passmore: Then two weeks after that will be Jay Van Bavel. He's the associate professor of psychology at Neuroscience at NYU and co-author of the book, The Power or Us. So that'll be another good one.
Had some very nice reviews recently on the Apple platform. VT Market Order from the USA recommended it despite, and I don't think we even called this before, Ben, "Despite the hosts militant multifactor extremism, the is my favorite podcast from two Canadians." So I don't know if that means there's no other podcast from two Canadians. I don't know.
Jay Forth from Canada said, "It's the best podcast. We're learning a wide range of financial topics, most of the episodes approach finance in a straightforward manner that doesn't require a financial degree to understand." Thanks us very much for the weekly education, increased his financial literacy and also enjoy the deep dive into the happiness and thanks us for the free socks.
Ben Felix: Very nice.
Cameron Passmore: So we also received an email to The Rational Remainder information address saying hi to us, "Only has Messenger as a social media platform." He couldn't figure out how to comment on our 203rd episode, but just wanted to follow up with some really positive feedback. "Loved your paper." Cannot emphasize enough how profoundly the article and that paper resonated with them. Very nice comments, new to The Rational Reminder podcast and thoroughly enjoying the content and actually found us because, "Your videos were linked to the Mark Meldrum CFA prep platform." That's how he discovered it.
Ben Felix: Yeah. They've been on there for a while.
Cameron Passmore: So Harry thanks us and you specifically very much, "Had a bunch of people connect with me on LinkedIn recently." Connor Montreal thanks us for our value-driven and data supported approach in an industry that cannot always be value and principle-driven. He finds it refreshing and vitally important.
Nick in Northern Ontario said that as an engineer working through a CFA program, that content couldn't be much more relatable. Listening to RR has become his routine over Saturday morning coffee before the family wakes up. I hear that a lot, actually. I think we're a lot of people's weekend coffee listening.
An advisor out west get this reached out saying he's not happy selling the products they are forced to and was actually asking me about career options, and then another advisor, Jeff in Calgary, thanked us and said that the podcast has helped him build his financial planning practice and he models it after us.
On the reading subject, Luke reached out on Twitter to recommend that I check out some fiction for book recommendations, specifically And Then There Were None. So we'll look into that. I got this book list now because it was getting chaotic organizing which books for which weeks. So I started loading it up into my Evernote and I got books stacked up well into the fall because we have this every two weeks. We've launched a book club at work as you know. So that's going to be every month. Then there's the guest books we have to read, which don't count towards the every other week. So once you map it out, it gets pretty crazy.
Ben Felix: You're not going to double up?
Cameron Passmore: No.
Ben Felix: Double count?
Cameron Passmore: I never double up. I've never doubled up. No. A guest is a guest. I mean, you read the guest books, too. You're reading just as much as I am. Anyways, in the store, keep asking for your free tuke. There's still some left. Just put a note at checkout. Every order gets a free pair of socks. Lots of orders coming in that are getting the 50% off for people that are reaching the halfway mark in the 22 in 22 challenge. So it's nice to see. Even people hopping on getting something at half price, get the free socks and get the free tuke. So it's a pretty good bundle. Pretty good value.
Ben Felix: I did want to say we've gotten some really nice feedback on our crypto episodes, both in The Rational Reminder community and the comments on the videos. It's been really well-received, I think. So that's been nice to see and people are watching them and listening to them. The download numbers for those episodes have been as high or higher than our regular Rational Reminder episodes. I mean, we didn't try to time this or anything, but it's timely because, obviously, if anyone's paying attention to crypto market valuations, it's been pretty spicy. So I wouldn't be surprised if people are looking for, I don't know, sober information on the topic. Anyway, so we're happy that it's been well-received so far and we're looking forward to continue releasing those episodes.
Cameron Passmore: Agree. All right. Let's get to the episode.
Ben Felix: Welcome to episode 205 of The Rational Reminder podcast.
Cameron Passmore: For this week's book review, it's something that came up. I listened to a couple of podcasts lately. One might have been Invest like The Best with Patrick O'Shaughnessy, I believe. I'm not even sure what guest it was to be honest, but this book came up a couple times. I thought I'd go back and check it out. I'd heard about it before. It's a book by James P. Carse called Finite and Infinite Games: A Vision of Life as Play and Possibility.
I had first heard about this book when I read Simon Sinek's book, The Infinite Game, which I know we've reviewed in the past, and he really raved about the book in his book. Then he also interviewed James Carse in his podcast in late December 2020, just before the author passed away. It's a wonderful interview. Really nice guy. The book is a wonderfully written, easy read, but his language is so creative. I just found it a really beautiful book to read, and it's one of those books where you could easily reread it every couple of years. I liked it that much.
So James P. Carse was an academic and professor of literature and religion at New York University. He retired back in 1996 and he wrote the book in 1986. So this book was the inspiration for Sinek's book, The Infinite Game. The main point, again, similar to Sinek's book, is that there are two kinds of games. One is called finite and the other is infinite. The finite game is played with the objective of winning, and the infinite game is for the purpose of playing, not necessarily for winning. So finite a game always has a winner and it comes to a definitive end, usually in a defined amount of time, and this is what he talks about. Since finite games are played to be won, players do everything they can and have been trained for to win. Anything not done to win is typically not part of the game.
I mean, you think you were a, I guess, a pro basketball player, right? You practiced so many times and I can imagine that you imagine how the victories of games would go, right? It's a known amount of time, known agreed upon rules, and the only thing that wasn't known when the game started was who would win it, and that causes all kinds of super fun drama in watching a game where people have practiced the proverbial 10,000 hours or more in order to be masters at that game, and it makes it very exciting. However, it's not necessarily that creative. So finite games are much more dramatic. He talks at length about that. The ending is known. However, who will win is not known.
This is the big difference, though, with infinite games. Finite players are trained not only to anticipate and practice every future possibility, but also to control the possibility. Like you in basketball were trained at all sorts of different moves, right? Infinite players continue to play the game differently, which is to look forward to surprises, and then the subsequent creativity to keep playing the game.
Also, infinite games have many unknown players. Like you think in business, right? You don't know who your competitors are going to be. You don't know how your customers are going to react. You don't know what experiments such as this podcast, for example, what kind of impact this could have on the game that we're playing here. So infinite players prepare themselves to be surprised by the future. They play in complete transparency. He talks about totally vulnerable to what might transpire. How the game rolls out is not known. Therefore, they're vulnerable to the game, not just to their skills as a master or a pro in a finite game.
So training is highly needed, of course, in a finite game. In an infinite game, what you need, he explains, is education, resilience, and openness. I found that super interesting. Infinite game continues past one player's death. This just causes other players to figure out how to keep playing. Infinite players play for the game. Finite players play to end the game. Such an interesting paradox.
A powerful person is one who brings greatness to a finite game, a master or a professional. There are very few of them, but anyone can bring and be a strong person in an infinite game. So get this as an interesting quote. Strength is paradoxical. I am not strong because I can force others to do what I wish as a result of my play with them, but because I can allow them to do what they wish in the course of my play with them. Every move an infinite player makes is towards a horizon, but you can never reach the horizon. Every move made by a finite player is within a boundary. Every moment in infinite game therefore presents a new vision, a new range of possibilities.
He also had a really cool quote on culture, and culture, whenever I'm asked what's our culture, I find it for me difficult to explain. Here's how he explains culture. So this is how we wrote it. Since a culture is not anything persons do but anything they do with each other, we may say that a culture comes into being whenever persons choose to be a people. It is as a people that they arrange their rules with each other, their moralities, their modes of communication. Time does not pass for an infinite player. Each moment of time is a beginning.
Another quote here. An infinite player does not begin working for the purpose of filling up a period of time with work, but for the purpose of filling work with time. This gets back to the whole creativity thing, and I think it links back to your paper on Life Satisfaction and Happiness.
So the final quote for you. One never reaches a horizon. It is not a line. It has no place. It encloses no field. Its location is always relative to the view. To move toward a horizon is simply to have a new horizon. One can therefore never be close to one's horizon. The one may certainly have a short range of vision in narrow horizon.
Really enjoyed the book. We think about this a lot. Our book club at work kicks off this week. We're actually talking about Sinek's book, The Infinite Game, but this is a great support and actually inspired Sinek to write that book. Highly recommended.
Ben Felix: Cool. I never played professional basketball, by the way. I played NCAA basketball.
Cameron Passmore: It's near pro. I mean, it's near professional level, though.
Ben Felix: I suppose. What do you call it? The filter, the number of people that go from NCAA division one to professional is still pretty small.
Cameron Passmore: Right, but the point still stands. You practiced.
Ben Felix: Yes.
Cameron Passmore: Like crazy.
Ben Felix: Yes, it is true.
Cameron Passmore: Is it safe to assume that you would imagine how the game would go?
Ben Felix: Everything that you said is correct. I just never played professionally. Depends how you defined professionally, too. Technically, I was never professional by NCAA rules, but I was paid a lot of money for tuition and stuff like that indirectly.
Cameron Passmore: Very high level competitive basketball. How's that?
Ben Felix: Yes. I'm more comfortable with that.
Cameron Passmore: The point still stands.
Ben Felix: I only point that out because a goal of mine was always to play professional basketball and I never did. So when you said that I was like, "Well."
Cameron Passmore: I'm sorry. All right. I didn't mean to upset you.
Ben Felix: It's okay. I'll be okay.
Cameron Passmore: All right. You want to head on to recent news about Meta?
Ben Felix: Yeah. There are a few good little news items that I wanted to talk about. So apparently, Meta is soon going to be a value stock. Imagine that. It wasn't that long ago that we were talking about large cap growth companies. Now, they can't go up forever and all that kind of stuff. Well, there you go.
Cameron Passmore: I'm just looking at the price now. 165 right now, 52 week high was 384.
Ben Felix: Yeah. Unreal. So FTSE Russell's latest, and I haven't looked for an update of this, this is an article that I saw on ft.com, but FTSE Russell's latest updates on the two-month process on index reconstitution indicate that Meta will probably account for 1.8% of the value index once the reconstitution goes into effect at the end of trading on June 24th, and it'll be 0.49% of the growth index. So it's straddling, I guess, but it's in the value index.
Now, and we've talked about this many times, this is interesting, but it's not unexpected by any means. I always come back to Fama and French's 2007 paper, Migration where they showed how value and growth stocks have historically behaved in their sample after becoming value in growth stock, so what happens to a growth stock after it becomes a growth stock and what happens to a value stock after it becomes a value stock.
So quotes from there, that classic paper. The high expected profitability and growth combined with low expected returns, discount rates to produce high price to book ratios for growth stocks, that's when they get added to the portfolio. Well, low profitability, slow growth, and high expected returns, high discount rates is what creates low price to book for value stocks, but then over time, competition from other firms tends to erode the high profitability of growth stocks and profitability declines as they exercise their most profitable growth options.
So each year, some growth stocks cease to be highly profitable fast-growing firms that are rewarded by the market with low discount rates. So their profitability and growth options are depleted. At the same time, their discount rates increase. So valuations start to converge as a result, price to book ratios of growth portfolios tend to fall in the years after portfolio formation. Conversely, the price to book ratios of value portfolios tend to rise in the years after portfolio formation, as some value firms restructure their profitability improves and they're rewarded by the market with lower discount rates so their valuations increase.
It's like for gross stocks, sometimes fundamentals get worse and valuation multiples decline, and for value stocks, the opposite thing happens. That's where the premiums come from or a big chunk of it, that convergence in price to book.
Cameron Passmore: Yup. Exactly.
Ben Felix: So interesting headline, but not necessarily surprising.
Cameron Passmore: There could be other stocks as well.
Ben Felix: Yeah. It'll be interesting to see what constitutes a value portfolio in six months or whatever. I also wanted to touch on a nice article that Cliff had. Speaking of tech with respect to the value, Cliff had a post-explaining that the value spread, that's the valuation spread between growth and value stocks, is not all about tech stocks.
Cameron Passmore: That's Cliff Asness, by the way, for those who don't know.
Ben Felix: Yes, Cliff Asness, who leads AQR. He's been a guest on the podcast. He's also been pretty snappy on Twitter recently. I don't know if you've been following.
Cameron Passmore: Oh, I love it when he's back. He went off Twitter for a while?
Ben Felix: Oh, he's a bit aggressive for my taste, but, hey, it's still fun to watch, I guess. Okay. So I think that there's a common perception that the growth versus value story over the last decade or so has been all about tech. Tech is what is causing value to outperform. If you're overweight value, your underweight tech, which is true, but that's not necessarily the whole story. If you look at the value strategies that AQR runs and that Dimensional runs that we use, they're within industry value portfolios.
So industry weights are capped and companies are re-weighted within industries to create the value tilt. There's evidence. I can't remember the paper off the top of my head, but there's evidence that is how you get the value premium. So that makes sense to do it that way.
Now, that's important, though, because if value is fully explained by tech or if growth is fully explained by tech, then within industry tilt is less interesting to talk about, but it's also important to mention, I guess, that AQR strategies are typically long short. Well, of course, Dimensional is long only. So in the Dimensional portfolios, you do still have growth, whereas in a AQR long short factor portfolio, you wouldn't.
Yeah. So in this post, he shows that the current industry neutral value spread, so that's the re-weighting within industries, not across industries, is that it's 95th percentile of expensiveness relative to its own history. We can put that chart in the video, but it's right up there. So value is still historically cheap relative to its own history since 1990, its US value, but then he looks at a tech index versus the S&P 500, so the value spread between tech and the S&P 500, which is just meant to illustrate the relative valuation of the tech industry. It's only at its 84th percentile of spread relative to its own history.
Cameron Passmore: Even after these price declines.
Ben Felix: Well, after the price declines. Well, yes, right. So it's still high, right, is what you're saying. So the price have come down a lot, but it's still pretty expensive. So why that's interesting is that, I mean, techs come down a bunch. Like you say, Cameron, in relative price, that spread has compressed a little bit, but across all industries, value is still very cheap relative to growth. So it just shows even though tech's gotten hammered recently relative to value, growth is still expensive across industry. So it's more than just a tech story.
The other thing that I think is interesting there is that tech, now that the valuations have compressed, expected returns are a little bit higher, but that doesn't mean that expected returns on value are no longer high. So tech has higher expected returns, yes, but that doesn't mean that values become less attractive across all industries. So I thought that was interesting to mention because I think that narrative of value versus tech is pretty strong.
I also wanted to touch on David Blitz had a new paper in the Journal of Portfolio Management, where he looked at expected stock returns when interest rates are low. I thought this is worth mentioning because it's something that we've mentioned a few times on the podcast, just the idea that if interest rates are low, then expected returns are also low because you're earning a risk premium over the risk-free rate. So if the risk-free rate is lower, your expected return should be lower, assuming a constant risk premium, but this paper looks at that and finds that it's not actually the case.
So they had looked at that empirically and they actually strongly reject the hypothesis that a higher risk-free return implies higher total average stock returns, which is what you'd expect. If there's a constant risk premium and the risk-free rate goes up, you'd expect a higher stock return, but they find that is not the case. So it's neat. There's a chart that we can put in the video that shows the total returns and how they break down over time between the risk-free return and the equity risk premium, but the equity risk premium is not constant in their sample.
They find that the result holds for the US market, as well as most international stock markets, with Japan being the one anomaly where it looks how you might theoretically expect. It's also robust when they include control factors like Cape, who was the big one that they used, but they use other control factors. So their conclusion is that expected total stock returns seem to be unrelated or maybe a little bit inversely related to the level of the risk-free return.
Counterintuitive, it's not what you'd expect. So the equity risk premium tends to be higher when the risk-free rate is low and lower when it's high, but it's a pretty weak relationship. You can see in the chart that we'll post it's probably safer to say that it's unrelated and their suggestion is that it stems from the operating performance of firms relative to rates, not from multiple expansion or risk-based explanations. Yeah. Interesting, but they importantly don't find that this information could be used as a market timing signal because the equity risk premium is still positive in all risk-free rate scenarios, but it is contrary to conventional wisdom.
So anyway, I learned something from that paper. I mean, I've always had the model of the risk premium is relatively constant, and so if risk-free rate goes up, your expected total return goes up, but they're saying that's empirically not the case.
Cameron Passmore: Yeah. It's interesting your comment. You can't market time around it because the premiums are still expected to be positive. So leaving that asset class wouldn't make sense is what you're saying because it's not like it has a negative premium.
Ben Felix: Exactly. So you can't time your exposure based on the risk-free rate, but-
Cameron Passmore: Adjust your expectations down as the risk-free rate increases.
Ben Felix: A little bit, but that's the part where it's like how strong is that relationship and how predictive is that relationship. I'm not sure.
Cameron Passmore: Interesting.
Ben Felix: When you look at the comparison of total returns over time, there's not an obvious pattern.
Cameron Passmore: Neat.
Ben Felix: Yeah. I just thought it was cool.
Cameron Passmore: Okay. Canadian social survey.
Ben Felix: Yeah. Did you see this? Did you know that this existed?
Cameron Passmore: I did not.
Ben Felix: Wow. It blows my mind.
Cameron Passmore: There's a lot I don't know exists.
Ben Felix: Puts Canada in some leadership position with respect to what we know about our citizens, I think. So Canada has a quality of life framework. It was publicly released in budget 2021 alongside federal budget investments aimed at strengthening national data sets and better incorporating quality of life measurements into decision-making and budgeting. That's awesome. I'm glad we're doing that. It is. It's good.
So they've released data recently on life satisfaction and meaning and purpose for Canadians based on a recent set of surveys that they conducted. The surveys are all available online if you want to look at the questions that they were asking people, and you can sort the data by province and a bunch of other sociodemographic characteristics.
So they measured life satisfaction on a scale from zero to 10. Respondents were asked, "Using a scale of zero to 10, where zero means very dissatisfied and 10 means very satisfied, how do you feel about your life as a whole right now?" So it's like the Cantril ladder concept that we've talked about before. They also asked about sense of meaning and purpose, which is measured, again, on a scale from zero to 10. Respondents were asked, "Using a scale from zero to 10, where zero means not at all and 10 means completely, to what extent do you feel things you do in your life are worthwhile?"
That's the setup for the data that we'll talk about briefly here. Across Canada, they found that 51.7% of people rate their life satisfaction as an eight, nine or 10. By province, and this is interesting, Newfoundland had the most people with life satisfaction at eight, nine or 10 at 61.7% of people, and British Columbia had the least at 46.5%. Newfoundland also has the most frequent response of sense of meaning with a eight, nine or 10 rating, 66.1% of people in the survey, and BC had the lowest at 54.6%.
Cameron Passmore: Wow.
Ben Felix: Now, why I found this particularly interesting is that on other metrics like median income, being the one that I think is quite interesting as an observation, BC is at the higher end, not the highest, but it's at the higher end. It's above the national median, and Newfoundland is at the lower end. Again, not the lowest, but it's at the lower end of the Canadian provinces, and that's based on 2020 census data, which is neat. Shows that relationship of the wealthier provinces not necessarily happier, and in this case, it's actually quite a bit less happy.
Then on the sociodemographic sorts, retired people have higher life satisfaction than working people. 60.1% of people gave the eight, nine or 10 for life satisfaction versus 51.7, which is the same as the sample average for working people, but they have a similar frequency of a strong sense of meaning and purpose. So that was interesting.
Then with that data point, living in Newfoundland is a better predictor of life satisfaction and sense of meaning and purpose than being retired. That was neat. That was just my observation.
People in rural areas are more frequently reporting high life satisfaction, 57.6% of people in rural areas compared to 50.6 in population centers.
Cameron Passmore: That's not surprising.
Ben Felix: Yeah. It's interesting. A lot of the data points are consistent with other research. People in rural areas also have a stronger sense of meaning and purpose with 65% of people giving the eight, nine or 10 versus 57.5 for urban areas. I also found it interesting. There are studies going back as far as 1999, maybe earlier, showing that Newfoundland is an outlier with respect to life satisfaction. I mean, anecdotally, I can say having spent a decent chunk of time visiting Newfoundland and having grown up in BC, I get it.
Cameron Passmore: Absolutely.
Ben Felix: I can see the pace and feel are just super different, and same for the rural versus population center life. Those findings didn't surprise me either based on my own anecdotal experience.
Cameron Passmore: Agree. Interesting stuff. Okay. Main topic this week is private equity.
Ben Felix: Yeah. I thought we talked about private equity. We've seen more and more people asking us about it and getting pitched on private equity funds as an investment. Vanguard's even gotten into the private equity game. They've started making private equity available to some of their retail customers. It's still a pretty high net worth threshold to access, but it's there. The way Vanguard explains it in a white paper is that private equities' significant illiquidity and market dynamics provide suitable investors the opportunity to earn long-term excess returns while increasing portfolio diversification through expanded equity market coverage.
Cameron Passmore: Sounds good.
Ben Felix: Okay. Yeah. It does sound good. It even sounds theoretically consistent that illiquid assets in markets that are more difficult to access would have higher expected returns and opportunities for managers to add value, maybe even enough value to justify their fees, which in private equity are fairly high. Estimates that account for everything because there are a lot of different layers of fees in private equity, estimates in a single number are around 6%.
So you're paying equivalent to approximately 6% per year in fees to own private equity as an asset class. Again, that's through a whole bunch of different layers and types of fees, but it roughly comes out to 6% as an estimate. So sounds pretty good, theoretically, but there's a big empirical question there, which has been hard to answer, not for me, but for the people who have done the research. So it's an empirical question. Does private equity outperform public equity net of fees? So that's what we want to talk about.
Now, evaluating the performance of private equity is hard, and that's why I said it's been a difficult question for the researchers to answer. Illiquid assets with lumpy cashflows, which is what private equity investments are, can't be compared to the performance of a public equity index.
So often, IRRs, internal rates of return, are used to evaluate private equity performance, but they're not comparable to the typical time-weighted rates of return that most investors are familiar with. So you can't really take a private equity IRR and compare it to the performance of the US market, for example. The math is just very, very different and it would be a very misleading comparison to make. The IRR is technically the discount rate that makes the net present value of all cashflows equal to zero in a discounted cashflow analysis.
Now, the way the math works is particularly problematic because if you think about any large private equity firm or private equity firms in general, one thing that they're going to have in common, typically, is early success. So you think about Blackstone had the historic Hilton deal where they made billions of dollars for investors. Deals like that are what create the foundation for firms that will go on to be successful private equity firms.
Now, those early successes, because of the way that the IRR calculation works, set those firms up to have very sticky IRRs that stay at a high level, and it's very difficult to change them even if later returns are not as good or later investor cashflows are not as good. So that's interesting. Actually, if you look at the big private equity firms, if you look at Apollo's reported in their SEC filings, IRRs, KKRs, same type of idea, the since inception IRRs are basically constant numbers in all of their filings over many years, and that's because of the way the math works. It's anchored on the early success and very, very difficult to move after that.
Cameron Passmore: So that does not drift down over time.
Ben Felix: That's what I'm saying. It'll stick. It's sticky. The IRRs are very, very sticky. Unless there's a total blow up or disaster, you'd expect that IRR to stay constant. So the challenge for investors is if you look at the IRR, it's not telling you a whole lot about what the recent returns have been or even what the returns have been relative to the market. Would you have been better off investing in this private equity fund or the market? The IRR makes it look like you would've been better off in the private equity fund, but they're not comparable numbers at all.
Cameron Passmore: You're likely to only be presented with high IRRs, I'm guessing.
Ben Felix: Well, yes, but I also think that their survivorship here is huge, the firms that are early on successful or the firms that are going to stick around and the firms that have these high sticky IRRs to recommend. So a lot of this comes from Ludovic Phalippou, who we'll talk to in the next little while. He's very passionate about how misleading the IRRs can be. Anyway, so I don't think most investors understand this. You see a 39% IRR and it's like, "Hey, that is great. I want that," right?
Cameron Passmore: Of course.
Ben Felix: Like you said, Cameron, they're in the pitch decks from private equity investments like, "Here's our since inception IRR. Wow, 26%. Wow, 39%. I want that in my portfolio," but it's super important to understand, you cannot compare the 39% IRR to the equity market return. The calculations are just too different, and often in the case of IRR skewed toward early successes.
So we need better tools to evaluate private equity. Fortunately, there are some. One of them is multiple of money. So you just take the sum of all cash inflows and divide that by the sum of all cash outflows, and that gives you the multiple on your money invested. Of course, that has lots of gaps in it, too, but it's just one other tool. So you can look at IRRs. You can look at multiple of money. It's interesting because if you look at the IRR and it's 50%,but the multiple of money is 1.5%, well, okay, that tells you a lot about the informational content of the IRR.
Then the other one is the Kaplan Schoar PME, who's introduced in a 2005 paper. PME is the public market equivalent. So it's a net present value calculation. It compares the results generated by a private equity strategy to those generated by investing the same cashflows in a benchmark index, and it gives you a number.
So for example, the PME, if it's 1.2, that tells you that the private equity strategy beat the benchmark by 20% cumulative over the holding period, and you can back out what the annualized return difference is from that if you want to. Now, the thing about PME is that it's very sensitive to its benchmark. So a PME of 1.2 relative to the S&P 500, you don't know if that's private equity alpha or if it's just a small cap premium because you're comparing it to the S&P 500 and private equity investments will tend to be smaller companies.
Now, the other thing that's tricky in looking at all of these data is that one of the benchmarks that's often used, recognizing what I just said, one of the benchmarks that's often used in the place of the S&P 500 or as an alternative benchmark is the Russell 2000. Now, the Russell 2000 has some real big problems. It's performed terribly, and this is a thing that's well-known in investment management. If you want to build a small cap strategy that beats the benchmark, you can just benchmark it against the Russell 2000, and the rest is easy. That's a joke, but it's a little bit true.
From 1994 through April 2020, the Russell 2000 returned and annualized. That must be April 2022. Anyway, the relative numbers are what matter. So for this long period of time that I pulled the data for, the Russell 2000 returned and annualized 8.66% while the S&P small cap 600 index returned 10.44%. The Dimensional US small cap index returned 11.58%, and over the same period, the S&P 500 returned 10.11%.
So the important thing here is that if we're comparing PMEs, how do private equity do relative to a benchmark, and you're looking at, "Okay. Well, the S&P 500 over this period did 10.1%. Okay. Let's use a small cap index," but the Russell 2000 over the same period returned 8.66%. So that's not necessarily going to help you adjust for any size premium.
The other important thing there is that there was a size premium over this period. The Dimensional small cap index beats the S&P 500 by about 1.5%. It's just that the Russell 2000 did really poorly. So that can be misleading, too.
Cameron Passmore: To beat this, you still have to get over your fee bogie.
Ben Felix: Yes. So PMEs would typically be calculated as a net of fee number. So you're using net cashflows to arrive at the PME, but yes, you're right. The fee hurdle is still big to overcome. So some of these other papers use the Russell 2000 value index, which is a little bit better, but again, it's still pretty rough. Over the same period, '94 to 2020, the Russell 2000 value returns 9.57%, and the Dimensional US small cap value index returns 13.04%, right?
That index choice is handicapping the index, which I think leads to an overstatement of PMEs. We'll see more about that in a minute, but that's the framework to think about evaluating private equity performance.
There's a 2020 paper, Private Equity Performance: What Do We Know? They look at the performance of almost 1400 buyout and venture capital funds. So that's leveraged buyout and venture capital. They use data from a data provider called Burgiss. This is the other thing that you find out about when you start looking at private equity. There's a few major data providers, and they've all got different sources, different research, looks at different data providers.
One of the papers that I looked at looks at all three data providers and suggests that they're all unbiased and that they're all good data sources, but it's interesting. Private equity data is understandably not as good and clean as public equity data, which just makes sense.
Anyway, so in this paper, they find outperformance relative to the S&P 500 of 20%, so PME of 1.2 for buyout funds, and they say that's equivalent to more than 3% per year excess return relative to the S&P 500, and then they also test it against the NASDAQ, the Russell 2000, the Russell 2000 value, and they find that their outperformance results are robust, but keeping in mind what I just said about the Russell small cap indexes. They find that venture capital funds in the US outperform public equities in the 1990s, but have underperformed public equities in the most recent decade.
The sample median buyout fund, so the sample average was 1.2. The sample median is 1.11, and then for venture funds, and this is pretty important, the sample average PME is 1.2, but the sample median for venture is 0.88.
Cameron Passmore: Wow.
Ben Felix: So the sample average is 1.2 for venture capital, but if you get the median fund, you're underperforming public equities pretty substantially.
Cameron Passmore: So that's skewness?
Ben Felix: Massive skewness in venture capital, yeah. Huge dispersion in venture capital returns, and that's particularly important for venture capital based on the persistence data, which we'll talk more about in a second. Changing the benchmark to the Russell 2000, the sample average PME for buyouts does drop down a little bit to 1.07 for the Russell 2000 value. Again, we're using the worst small cap and small cap value indexes out there, but the PMEs are still dropping down closer to one.
We saw how much better the numbers are for the other small cap indexes a minute ago. You would expect the PME to drop down even lower, which other research talks about that I'll get to in a minute. Now, for venture, the sample average PMEs are well above one for all benchmarks, but the sample medians are all well below one.
Cameron Passmore: Wow.
Ben Felix: So again, massive skewness, and Bill Janeway talked to us about this. There's a big adverse selection problem in venture capital. It probably makes more sense for most investors to think about the median VC return, not the mean average, because the funds that are driving the mean are funds that you probably can't access. So the best VC funds do tend to perform exceptionally well. There's a lot of skewness, but you probably can't access the best funds.
The other thing in this paper that's important for investors today to think about is that both absolute performance and performance relative to public markets are negatively related to aggregate capital commitments for both buyout and VC, and 2021 was a massive year for capital raising in both private equity and venture capital.
So then there's a followup paper that they did. You know what? I think I said that Private Equity Performance: What Do We Know? is a 2020 paper. That's a 2014 paper. So a 2020 followup paper, Has Persistence Persisted in Private Equity: Evidence From Buyout and Venture Capital Funds. The authors update the performance data from the previous paper, and they ask if there's persistence in performance for private equity funds. They find that post 2000 buyout funds have modest persistence, but it's driven by the persistence of the worst performing funds. So that's interesting. There is persistence, but it's in the worst performing funds.
Cameron Passmore: The bad ones keep being bad.
Ben Felix: Right. So you can choose not to pick the worst performing funds and that'll be persistent, but-
Cameron Passmore: It is a strategy.
Ben Felix: Right. In the top quartiles of performance, there's no statistical difference in future performance among funds previously in the top three quartiles. So if you look at the best buyout managers and only invest in those, you're not increasing your chances of getting top quartile performance in the future.
Now, in venture, they do find persistence of the top performing funds, which is interesting, but I think even then, even though there is persistence in the top performing funds, it's tricky to even know which ones are the best performing funds.
There's another paper, Are Too Many Private Equity Funds Top Quartile? The authors in that paper find using three major data sources and applying metrics typically adopted in the private equity industry that even modest variations in methodology can result in half of all funds being able to claim top quartile results. So that's a little tricky.
I think it's a recognized problem in private markets that the disclosure and the reporting is not systematized to a point where you can actually understand what's going on in the market, which is a big challenge, obviously, for investors, and it requires a whole different level of due diligence to participate.
Anyway, so it's easy to say that you invest in top quartile funds, but there's a chance that they're not actually top quartile, even though they can show with their own data that they are. Okay.
So in those papers, in those two papers, the 2014 paper, Private Equity Performance: What Do We Know? and the 2020 paper, Has Persistence Persisted in Private Equity? they together paint a reasonably rosy picture, I think. I mean, those papers don't talk about the problems with using the Russell indexes as a secondary benchmark, but if you forget out about that, if you don't know that information, both buyout and venture capital look quite compelling from the perspective of delivering PMEs above one.
So if you're an investor looking at that and you want returns in excess of what public equities can deliver, they look like attractive asset classes, but then in Ludovic Phalippou's research, so he's got 2020 paper, An Inconvenient Fact: Private Equity Returns and the Billionaire Factory, he shows that the historical performance of private equity in aggregate and leveraged buyouts on their own. So he looks at multiple data vendors as well.
From Burgiss data, so that's one of the data providers, same as one of the previous papers, the PMEs are below one for private equity in aggregate and slightly above one for leveraged buyouts. In his sample, multiples of money for private equity are 1.57, buyouts are 1.65. Now, that's similar to public equity indexes over the same period. Ludovic also presents the PME data for three different providers, I think, and different data providers, I guess, they must all be, I haven't used any of them, but they must all be softwares that you can explore the data in because he says that different data providers allow the use of different benchmarks to calculate the PME.
So they would have it built into their software to select these different benchmark indexes. So because of that, he shows varying benchmarks to show PME and they don't all have small cap, and some of them have Russell. Some of them have S&P, but whatever, but the trend is that for vintages from 1996 to 2005, private equity delivered PMEs well above one when you compare it to the S&P 500, but only slightly above one compared to the S&P small cap 600 index or he also uses the Dimensional microcap fund as a benchmark.
His suggestion in his papers is that that's probably a pretty good benchmark to private equities because it's a live fund that's been around for a long time and it holds closer to the types of capitalization that private equity funds would hold.
More recent vintages, so 2006-2015, private equity and aggregate has trailed small cap public equities and buyout funds have had a very small edge. So he shows that the reported private equity multiples of money of five pension funds from investments that they had made between 2006 and 2015, and this is just from public reporting, the multiples of money are similar across all pension funds, which is interesting, and they're similar to the aggregate Burgiss data that we saw in the data that I was talking about at the beginning of this paper.
Then of course, they're also very similar to the public equity indexes over the same period. So this is his thesis in the paper is that, "Well, look, it's one time period," but he's saying that, "Look, from the 2006-2015 vintages, you would've done just as well in public equities," as he did in private equities.
The last data that he reports or that I'm going to report from his paper is from the big four private equity firms. So from Apollo, Blackstone, Carlisle, and KKR, and he finds that their net multiples of money for the 2006 to 2015 vintages are remarkably similar to the aggregate data. In the video, we can put charts for all these, which are, like I've been saying, not a whole lot different from public equities over the same period.
He also points out that, and his title is pretty provocative, The Billionaire Factory, that's one of his big messages, is that while private equity has an asset class has not delivered much, if any, value to investors net of fees relative to public equities. Private equity as an industry has minted 19 new billionaires from 2005 through 2020.
So of course, these are not investors in the PE funds, but the people running the PE funds. That's sounds like it's supposed to be a shocking figure. I don't think it's actually surprising, though. Gross of fees, the private equity funds are delivering substantial value. Net of fees, they're not. All of the economic rents from their skill are being absorbed by the managers, not by their investors, which is what you'd expect.
We've talked before about the 2004 Berk and Green paper, Mutual Fund Flows and Performance in Rational Markets. You would expect that skilled managers would grow their funds to the point that their investors don't benefit from their skill, that investors end up for earning returns commensurate with the risk they're taking and the fund managers are the ones that reap the benefits of their skill by charging fees in a larger asset base.
So I think that's pretty good theoretical framework, and I think that's probably what's happening. The private equity managers are skilled. They are delivering substantial gross of fee excess returns. It's just net of fees you're not. You don't get to keep it, which is exactly what you'd expect from the economics of better arrangement.
So I think Ludovic is saying, "This is a big deal, and this is bad, and look at all these billionaires," but it's like, "Well, they're actually-"
Cameron Passmore: They're earning it.
Ben Felix: Yeah. They're earning it. It's just they're keeping all of the profits. I think part of Ludovic's whole thing is that the contracts should be structured better to favor limited partners as opposed to being so beneficial for general partners. Anyway, we can talk to him more about that, but it is all very, very interesting. Okay.
So if it is true that managers are absorbing the benefits of their skill through their fees and that the investors are just getting returns commensurate with the risk they're taking, that still leaves open the possibility that private equity is delivering risk exposures that you could not alternatively get in public markets.
So even if you could access PE as an asset class and even net of fees you're getting some cool asset class exposures, that can still be very interesting. So that's the next question you have to ask is what risk exposures are you actually getting by owning private equity?
One of the common arguments that we saw off the top Vanguard has also made is that there's an illiquidity premium, where by owning illiquid assets, you expect to earn higher returns by supplying capital to these illiquid investments for locking your capital up. Of course, private equity is illiquid. That's a pretty good theoretical argument that there's an illiquidity premium, but in the paper, Demystifying Illiquid Assets: Expected Returns For Private Equity, the authors explained, and Cliff Asness has also written about this, and the authors of this paper are actually from AQR as well, they explained that while there may be that theoretical risk-based illiquidity premium, in practice, there's a good chance that it's largely offset by investor willingness to overpay for the returns smoothing effects of illiquid assets.
Cameron Passmore: Can you imagine?
Ben Felix: No. It's a funny one. It's an interesting one to think about. So it's like private equity assets are not marked to market. So if we sell a client to private equity investment, it's valued, whatever it is, quarterly, and that results on investment statements. Well, there's a whole thing on Twitter about this recently where it was Cliff, Cliff was the one tweeting about it, where there's a private equity fund or a hedge fund or something that they had said that their public equities were down this amount over the quarter, but their private equities were down, whatever, much less. Cliff was all enraged saying, "That's ridiculous. Just because you hadn't valued the private equities over this reporting period."
Cameron Passmore: That's right. He does a great job, by the way, describing all that in a podcast, The Long View with Christine Benz. It's a live podcast. They recorded at the Morningstar conference. So it's easy to find. Cliff talks in the back half of that interview exactly about this phenomenon in this paper. It was really good interview.
Ben Felix: Yeah. Interesting. Yeah. So the effe0ct is that if an investment manager wants to make their returns look smoother to keep their clients happy and keep their clients in their seats, which may not even be a bad motivation, maybe that's good. Maybe we should report our returns less and people would be better off. We talked to John List about that.
Cameron Passmore: John List said exactly that last week.
Ben Felix: Yeah. So if enough investment managers have this preference for illiquid assets because it makes returns look smoother and they're effectively willing to overpay for that smoothing effect, that could completely or partially offset any notion of a risk-based illiquidity premium. So I think Cliff's racy title for his blog post about this, his 2019 blog post is The Illiquidity Discount. It's funny.
Now, there's actually a 2014 paper that looks at the true diversification effect of private equity because this is the other argument is that there's a diversifying effect. Again, that ties back to the reported returns, which because of the smoothing are going to look like diversifying assets relative to public equities. So this 2014 paper, Private Equities Diversification Illusion: Economic Co-Movement and Fair Value Reporting finds that while private equity managers, pension fund managers, and investment advisors assert that private equity investments diversify investor portfolios, it's really cost-based methods of accounting that underestimate the systematic risk of private equity, which creates this illusion of diversification.
They use for their analysis, this is interesting, European private equity funds we're required to switch to fair value reporting at some point, and when that happened, reported correlations between accounting-based private equity returns and those of public equity increased a lot, and private equity funds found it more difficult to access capital after that happened. Interesting.
So the authors of Demystifying Illiquid Assets: Expect Returns For Private Equity find that compared to a risk appropriate benchmark, so they say like we were just talking about, you can't look at the risk of private equities based on their reported returns. You have to either de-smooth the returns or take some other approach to measure the risk.
So they find a risk appropriate benchmark for public equities and find that against that benchmark, there's no evidence of an illiquidity premium, but it could still be possible that private equity investors are getting really good access to stuff like the size and value premiums. Then of course, the next question is, are you better off getting the size and value premiums in public equities or is there something special in private equities?
We've said, "Okay. Illiquidity, maybe not so interesting." We've kind of talked about manager skill, maybe not so interesting, net of costs, unless you can get the best venture capital funds. So now we're saying, "Are there deeper, for example, size and value premiums to the extent that you'd be willing to pay high fees for them in private equity?"
So 2021 paper, Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting, Erik Stafford finds that direct investments in private equity funds can earn lower mean returns than a replicating strategy that consists of low-priced small cap public stocks with leverage. So you take your small cap value stocks to roughly match the characteristics of a private equity portfolio. Lever it up a bit to match the leverage in the buyout funds, and you can outperform their returns on a risk-adjusted basis.
So if it were the case that private equity offered exposure to cheaper assets, then could be accessed through public equities, there could still be an interesting advantage to private markets, but in reality, private markets have been seeing their valuations rise to an extent where it's potentially on par with or maybe even more expensive in some cases than public equities, and that's what Bill Janeway calls the unicorn bubble. He talked about that on our podcast.
Now, historically, and there's a chart from one of the papers that I looked at that we can put in the video here, there's this seemingly obvious relationship between the historical valuation gap between public and private equities and the future return gap between public and private equities. So as the valuation gap has decreased historically, the return difference or the PME has decreased on future returns, which makes it look like, in some cases or historically maybe, investing in private equity was a way to get deep value exposure that you couldn't get in public markets, but that's largely gone away as valuations have increased.
AQR has in their expected return assumptions that they produce, they do a breakdown for private equity largely based on the methodology and the paper that we were just talking about. As of Q1 202 for the current vintage of US buyout funds, they peg it at 5.9% net of fees.
Now, for equities with a tilt toward factors, they have roughly 5% real. Those are both real returns. So there is, say, 90 basis points net of additional real expected return for private equities, but in their methodology for private equities, it's levered. I think it was 103%. So there's substantial leverage built in there. Could you lever up your public equities a bit? Could you tilt a little bit more to get that similar return without having to go through private equity? I think probably yes, and that's what some of the other research that we just talked about suggested as well. Okay.
So IRRs, which private investments often showcase, are not rates of return. Better metrics like the PME and multiples of money, when you use those, private equity returns have been similar to public equity, especially when they're compared to smaller and cheaper companies, and especially if you add a little bit of leverage. I would love the two first papers that we talked about that used the Russell 2000, I would love to redo those papers if I had all of their data with the S&P small cap 600 or with a Dimensional microcap or the Dimensional small cap value fund or something like that. I would love to see those data because just based on the relative performance of the Russell indexes and those other indexes over the period in question, I think the PMEs would all drop below, well below one, but I don't have access to those data. That's one of the problems with investigating private equities.
The other thing that's important is that there's huge dispersion in fund returns between the best and worst private equity funds. So in buyouts, you can avoid the worst funds because they're persistently bad, but you can't pick the best funds ex-ante because there's no evidence of persistence.
In VC, there is evidence of persistence, but you probably can't get the best managers. Therefore, you should look at the median return, which has historically been a PME quite significantly below one. Any illusion of diversification from private equity is simply due to its illiquid nature in the way that it's valued and reported. If you de-smooth returns or measure with fair value accounting like the other paper that we mentioned, it becomes pretty clear that private equity is just as risky, if not riskier than public equity.
So without evidence of a distinct illiquidity premium, without evidence of the ability to benefit from manager skill even if there is manager skill present or a diversification benefit in private markets, I find it pretty tough to make a case for this asset class, unless you have skill in selecting the best managers. That's the other thing is like there is dispersion. So it's tricky because if a consultant or whatever says, "I will get you access to the best managers," I mean, I guess, it's the same thing as public equities. If someone can give you access to the best actively managed public equity funds ex-ante, you would take it.
There's no evidence that you can get that, but you would take it. I think it's the same thing. It's the same thing, but even more extreme because of the more extreme dispersion in private markets. If someone can sell you access to the best private equity funds, you should take it if they can actually give it to you, but there's no evidence that they can. In venture capital, there is some of that evidence. Anyway, there is something there before fees, but after fees, which are, say, 6% or so, there's not a whole lot of leftover for investors.
Cameron Passmore: Absolutely fascinating.
Ben Felix: Yeah. I thought so. I want to reiterate that the first paper that I mentioned, Private Equity Performance: What Do We Know? I said it's a 2020 paper. It's a 2014 paper. I guess it doesn't really matter. It's a paper in the Journal of Finance, though.
Cameron Passmore: Excellent. All right. Anything else this week, Ben?
Ben Felix: No. We covered a lot of ground. I think that's it.
Cameron Passmore: All right. Again, thanks to everybody for listening.
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'Migration' — https://www.tandfonline.com/doi/abs/10.2469/faj.v63.n3.4690
'Value Investing Is Not All About Tech' — https://www.aqr.com/Insights/Perspectives/Value-Investing-Is-Not-All-About-Tech
'Expected Stock Returns When Interest Rates Are Low' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4045504
'The case for private equity at Vanguard' — https://institutional.vanguard.com/iam/pdf/UHNWPEBR_022021.pdf
'The Performance of Private Equity Funds' — https://doi.org/10.1093/rfs/hhn014
'Private Equity Performance: Returns, Persistence, and Capital Flows' — https://doi.org/10.1111/j.1540-6261.2005.00780.x
'Private Equity Performance: What Do We Know?' — https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12154
'Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2304808
'Are Too Many Private Equity Funds Top Quartile?' — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2193855
'An Inconvenient Fact: Private Equity Returns and the Billionaire Factory' — https://doi.org/10.3905/joi.2020.1.153
'Mutual Fund Flows and Performance in Rational Markets' — https://doi.org/10.1086/424739
'Demystifying Illiquid Assets: Expected Returns for Private Equity' — https://www.aqr.com/Insights/Research/White-Papers/Demystifying-Illiquid-Assets-Expected-Returns-for-Private-Equity
'Private Equity's Diversification Illusion: Economic Comovement and Fair Value Reporting' — https://www.hbs.edu/faculty/Pages/item.aspx?num=46095
'Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting' — https://academic.oup.com/rfs/article-abstract/35/1/299/6136189?redirectedFrom=fulltext