When Lowered Expectations=Progress
How Ted Seides' proposed PE vs. S&P bet helps the Alts Propaganda Machine.
We cannot repeat this enough.
Some of the most skilled people in the investment management industry are in client relations/marketing rather than investing. Relatedly, some of the most willing Investor-Rationalizers are institutional investors and consultants; too accepting of industry propaganda.
Today’s example relates to Ted Seides, who runs the (excellent in our view) Capital Allocators podcast. Seides just floated the idea (link below) of a bet that private equity will outperform the S&P 500 over the coming decade.
Industry insiders will see this proposal and go down rabbit holes, discussing relative leverage, sector weightings, geographic mixes, etc. Or maybe the prospect that it seems opportunistic to compare PE to a seemingly expensive S&P, or the fact that many PE firms used to compare performance to the S&P, then switched to a global benchmark once performance started looking bad.
These valid considerations ignore a more basic question:
Since when is a smidgen of PE outperformance vs. public equities a reasonable performance standard?
It should be much higher. It used to be: below is from a 2012 Northern Trust survey of PE investors.
We’ve come a long way, Baby!
We don’t want to be unfair to Ted Seides. It’s possible that he simply didn’t consider that PE ought to do much more than beat public markets by a basis point. The issue is that such a bet enables Alts promoters to lower standards and re-frame what is considered an acceptable outcome. Should we expect them to behave differently?
More problematic: the slippage also helps Alts investor-rationalizers. Here’s a benchmarking footnote from an institutional investor in 2010. VC and PE are benchmarked at global equities +4%. Per Annum.
Here’s a benchmarking footnote from the same investor several years later:
Yesterday’s table stakes/underperformance is today’s alpha! We have come a long way, indeed!
This deterioration in standards is common. Damaging for investors? For sure. For investment managers and consultants? It’s a form of commercial progress, even if, err, contrary to fiduciary ideals. This is where propaganda skills and an occasional moral flexibility come in handy.
Once brought into the PE world (or Alternatives in general), investors sold on an idea often become investor-rationalizers. The reasons are complex (and we will explore these in the future), but our observation is that--even for sophisticated institutional investors with no profit motive-- it’s often easier to lower the bar and claim continued satisfaction than to face facts and make hard decisions.
As AltsWorld continues its democratization, is it reasonable to think that less sophisticated investors will be better prepared?
Sources:
https://www.capitalallocators.com/a-new-twist-on-an-old-bet-with-buffett/
https://www.northerntrust.com/documents/brochures/asset-servicing/private-equity-benchmarking.pdf