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BLOGGER NOTE: What appears in this post are selected snippets taken from
Everyone now believes that private markets are better than public ones
EXIT: from low-productivity “sunset” firms ENTRY: into more productive “sunrise” firms.
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"Their total managed assets have risen by 76% in the past five years, to $1.3trn.
They have long specialised in buy-outs and property.
More recently they have grown in private-debt markets, too—in total their funds’ credit holdings have hit $470bn. . .
> Venture and buy-out funds on average did better than the S&P 500 index by around 3% a year after fees. The spread around that average is considerable. Investors in the top quartile enjoyed returns that were far higher than in public equity; investors in bottom-quartile funds did a lot worse.
Better returns for investors reflect in large part better operating performance by the firms that most funds invest in.
In the main, the academic literature finds that private-equity and venture-capital funds add value to the firms they own.
> They raise efficiency, revenue growth and profitability.
> The firms have better management habits than entrepreneur- or family-owned firms.
> Buy-outs lead to modest net job losses but big increases in both job creation and destruction. They spur greater efficiency by speeding up exit from low-productivity “sunset” firms and entry into more productive “sunrise” firms.
> VC backing spurs more innovation, patents and speedier product launches.
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Where Yale goes the world follows
Private capital was once a fringe interest. So what changed?
The growth in passive investing has made public markets less comfortable for midsized companies. They are not big or liquid enough to be in baskets of leading stocks, such as the S&P 500 or the FTSE 100, that are tracked by giant low-cost index funds. A generation ago a promising startup would typically go for an IPO within four years. Now the remaining active investors in public markets are less willing to take a punt on small firms.
Venture capital (VC), another part of the private universe, is feverish. SoftBank’s Vision Fund, a $100bn private-capital vehicle backed by Saudi Arabia’s sovereign-wealth fund, has funnelled cash into fashionable, unlisted startups. Other institutions have vied with it to write big cheques for Silicon Valley’s brightest new stars. Already some of these bets have gone awry. . .
The flood of capital into private markets ultimately rests on the belief that they will outperform public ones. There is evidence for this—in the past the best-run private-capital managers have beaten the returns from public markets, even after generous fees. And there are grounds to believe that this was no statistical fluke. Private capital, say its boosters, reduces “agency costs”. These arise wherever somebody (the principal) delegates a task to somebody else (the agent) and their interests conflict. Consider the public markets—no one has a big enough stake to make it worthwhile to monitor firms, which as a result get complacent or indulge in short-term earnings management to the detriment of the long term. Private capital, which is closely held in a few hands, is supposed to get around such agency problems.
Yet every investment craze is liable to overreach, blindness to risk and misallocated capital. Recent converts to the private world, dazzled by the historical returns, may not fully appreciate the hazards
