Latest news with #DavidSwensen
Yahoo
3 days ago
- Business
- Yahoo
Yale's $2.5 Billion Private Equity Sale Tests Its Vaunted Endowment Model
(Bloomberg) -- Yale University's $41 billion endowment, led for decades by the late investing giant David Swensen, has been the envy – and the blueprint — for many US universities eager to secure their financial future. Next Stop: Rancho Cucamonga! ICE Moves to DNA-Test Families Targeted for Deportation with New Contract Where Public Transit Systems Are Bouncing Back Around the World US Housing Agency Vulnerable to Fraud After DOGE Cuts, Documents Warn The Global Struggle to Build Safer Cars Swensen was the face of higher education's embrace of private equity, illiquid investments held for the long term. His push beyond the traditional stocks and bonds portfolio was a major part of the endowment's size doubling five times over. And where Swensen went, others followed. Now the Ivy League school is readying its first major sale of private equity stakes. Massachusetts Institute of Technology, University of Notre Dame and University of Illinois are each considering similar moves. After tying up swaths of their money in complicated private investments, US colleges are feeling the costs of emulating the Yale playbook more acutely than ever. President Donald Trump's war on elite schools is exacerbating cash pressures during a fallow period for private equity, and now colleges are planning investment shifts and unwinding some old bets. Yale's unprecedented shift underscores the eagerness of many schools to secure cash. Washington has aggressively cut government funding to universities and is trying to raise taxes on investment income generated by certain private endowments. Trump also threatened to strip schools of their tax-exempt status, and this week said Columbia University no longer meets accreditation standards. At the same time, private equity investments have been largely frozen amid a deal slowdown. Endowments are continuing to get less cash back from their private equity investments after almost a decade of meager distributions. That's turning secondhand buyers into winners. The pressures have raised new questions about the purpose of endowments and how to manage them. Universities typically tap about 5% of their endowments every year to contribute to the schools' operating budgets. That amount could balloon if colleges rely more on their endowments to fund ongoing expenses — pressuring investment chiefs to lean on more-liquid assets like stocks. 'What we're seeing now is fear, which is common when there's uncertainty,' said Sarah Samuels, a partner at consulting firm NEPC and a former investor for Wellesley College. Some investors don't have 'a ton of confidence that they should continue committing to private markets at the same pace.' Secondary Sales The Yale endowment, run by Swensen protégé Matt Mendelsohn, is nearing a deal — code-named 'Project Gatsby' — to offload about $2.5 billion of private equity stakes, according to people familiar with the matter. Secondhand buyers had considered valuing pieces of the portfolio at a 15% haircut, though the overall discount is expected to be less than 10%, the people said, asking not to be identified discussing private information. Yale declined to comment. Other major universities have been exploring private-asset sales. MIT's endowment, run by former Yale investor Seth Alexander, is researching a potential sale of private assets, as is Notre Dame, according to people with knowledge of the matter. The University of Illinois is considering a secondary sale as part of its portfolio adjustments, some of the people said. MIT also pulled back on an allocation to a private equity firm, slashing its check by two-thirds of what it had originally indicated, according to a person familiar with the matter. Representatives for MIT, Notre Dame and University of Illinois declined to comment. 'A lot of larger endowments have been concerned about liquidity and the potential impact of taxes on their portfolios,' said Jon Harris, the chief investment officer of Alternative Investment Management. 'Whether they are pulling the trigger as of yet or not, many endowments are having discussions on portfolio sales.' There's no shortage of potential buyers in the secondaries market, as alternative asset managers such as Blackstone Inc., Lexington Partners and Paris-based Ardian have been raising billions to snap up existing private equity stakes. This is expected to be a record year for secondary transactions as firms seize on investors' need for liquidity. For its part, Yale had been weighing a sale for more than a year. It considered trimming positions across dozens of funds as it sought to clean up older holdings and pare back some leveraged buyout funds. Multiple buyers, including Lexington and HarbourVest Partners, assessed the portfolio, according to people familiar with the matter. Lexington and HarbourVest declined to comment. Despite the sale, Yale isn't retreating from private markets. The endowment held about $20 billion across private equity and venture capital in mid-2024 and will continue to invest in funds and new managers. But the secondary transaction would mark a repositioning for the school. More broadly, universities' efforts to offload private equity stakes signal the potential for a pullback from an asset class endowments once piled into. 'The Yale model worked well for decades for many endowments,' said Philip Casey, founder of technology company Institutional LPs, who has advised endowments and foundations. 'But even David Swensen said it would be susceptible to a liquidity crisis during times of economic uncertainty.' 'Dark Corners' A former banker for Salomon Brothers and Lehman Brothers, Swensen was the CIO of Yale's endowment from 1985 until his death in 2021. When he took over, Yale's portfolio stood around $1 billion and was invested in a mix of stocks and bonds like most other major institutions at the time. Swensen advocated for endowments with long-term horizons to seek out more complex, illiquid assets. Worthwhile investments 'tend to reside in dark corners, not in the glare of floodlights,' he wrote in his book, Pioneering Portfolio Management, widely considered the bible of endowment investing. He stressed that not every endowment should follow this path, but dozens of schools emulated the strategy and embraced alternative assets such as private equity, venture capital and hedge funds. Investors who worked for Swensen went on to become some of the highest-paid endowment chiefs in the mid-2010s, running funds at Princeton, Stanford and University of Pennsylvania. By last year, US higher-education endowments held an average of 56% of their assets in alternatives, according to a study from the National Association of College and University Business Officers. But the Federal Reserve increased borrowing costs in 2022, and for the past three years, investors have grown increasingly frustrated by a lack of cash distributions. 'Costly and Wasteful' A House Republican bill calls for increasing taxes on an endowment's investment income to between 7% and 21%, depending on the size of the student body and amount of assets in the fund. MIT, Harvard, Princeton and Yale all have endowments that would meet the 21% rate, which would be an increase from 1.4%. The steeper levies could make high-risk bets and frequent trading less lucrative, while making rebalancing more costly. Pomona College, a liberal arts school in California with almost 1,800 students, said its annual tax bill would increase to about $40 million with the legislation, equivalent to about two-thirds of its financial aid budget. The school said it has paid more than $16 million in taxes on its investments since 2017. 'An increase of this magnitude will make it difficult for institutions like Pomona to further their commitment to making a liberal arts education affordable for students from all backgrounds,' Pomona said in a statement. The prospect of further economic attacks looms: the Trump administration in March identified 60 colleges under investigation for 'antisemitic discrimination and harassment,' the same rationale that the government used to cut billions in funding to Harvard University and to conclude that Columbia no longer meets accreditation standards. Consulting firm NEPC is advising clients to be more selective with private equity investments and to explore options to make sure they have enough liquidity, such as holding more cash or Treasuries or exploring a credit line or bond sale, according to Samuels. Yale's decision to shop its private equity stakes after years of sitting on the sidelines shows that there's less stigma around selling. Those moves can shave underperforming investments and adjust portfolios when a new investing chief arrives. For skeptics of alternative assets, the pullback boosts their argument that investors do just fine in stocks and bonds over the long term. Alternatives are 'costly and wasteful' for big endowments and pensions — with high fees eroding benefits in returns or risk reduction, according to Richard Ennis, a retired investment consultant. Endowment portfolios invested heavily in alternatives underperformed a stock-bond mix by 2.4 percentage points over 16 years through June 2024, according to a study he conducted. Yale's endowment generated annualized gains of 9.5% for the decade through mid-2024, beating the 6.8% average of US higher education institutions during that period. The S&P 500 returned more than 12%. --With assistance from Janet Lorin and Isabella Farr. Cavs Owner Dan Gilbert Wants to Donate His Billions—and Walk Again YouTube Is Swallowing TV Whole, and It's Coming for the Sitcom Is Elon Musk's Political Capital Spent? Trump Considers Deporting Migrants to Rwanda After the UK Decides Not To The SEC Pinned Its Hack on a Few Hapless Day Traders. The Full Story Is Far More Troubling ©2025 Bloomberg L.P. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
5 days ago
- Business
- Yahoo
Yale Nears Deal to Sell $2.5 Billion of Private Equity Stakes
(Bloomberg) -- Yale University, whose embrace of private equity and venture capital spawned legions of followers, is finalizing the sale of as much as $2.5 billion of those assets ahead of potential tax changes. ICE Moves to DNA-Test Families Targeted for Deportation with New Contract The Global Struggle to Build Safer Cars At London's New Design Museum, Visitors Get Hands-On Access LA City Council Passes Budget That Trims Police, Fire Spending NYC Residents Want Safer Streets, Cheaper Housing, Survey Says The Ivy League school's endowment is in advanced talks on the portfolio sale, code-named 'Project Gatsby,' with an overall discount expected to be less than 10%, according to people with knowledge of the discussions, who asked not to be identified because the information is private. Potential buyers had valued parts of the portfolio at a haircut of as much as 15%, some of the people said. The transaction would mark the first time Yale has sold significant private equity holdings on the secondary market and represent a repositioning of its $41 billion endowment under Chief Investment Officer Matt Mendelsohn. It would also be one of the largest secondaries transactions in a year that's set to a mark a record for that market. College endowments, facing pressure from a lack of distributions from private equity funds over the past few years and the prospect of higher taxes on income from their investments, have been looking to drum up cash. Republicans in Congress proposed increasing taxes on some private school endowments to as high as 21%, from 1.4%. Yale, which had been weighing a sale for more than a year, considered trimming positions across dozens of funds as it sought to clean up older holdings, some of the people said. The sale discussions included a so-called mosaic deal that allows buyers to cherry-pick specific investment funds they would like to acquire, some of the people said. Multiple buyers, including Lexington Partners and HarbourVest Partners, have assessed the portfolio. A representative for Yale declined to comment, as did Lexington and HarbourVest. Under the late David Swensen, the university pushed into alternatives to stocks and bonds — such as hedge funds, venture capital and private equity — in what came to be known as the Yale model. The approach revolutionized endowment investing as the money pools grew their exposure to more illiquid and complex investments. US higher education endowments held an average of 56% of their assets in alternatives, according to a study for fiscal 2024 from the National Association of College and University Business Officers. Yale, located in New Haven, Connecticut, had more than $10 billion each in leveraged buyout and venture capital funds on June 30, according to its fiscal 2024 financial report. --With assistance from Laura Benitez and Marion Halftermeyer. Cavs Owner Dan Gilbert Wants to Donate His Billions—and Walk Again YouTube Is Swallowing TV Whole, and It's Coming for the Sitcom Millions of Americans Are Obsessed With This Japanese Barbecue Sauce Is Elon Musk's Political Capital Spent? Trump Considers Deporting Migrants to Rwanda After the UK Decides Not To ©2025 Bloomberg L.P. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Business Times
7 days ago
- Business
- Business Times
Enhancing portfolios with private-market assets
[SINGAPORE] In 1985, Yale University Endowment appointed a young David Swensen to become its chief investment officer. From that year until he passed away in 2021, he took the Yale Endowment from US$1 billion to over US$40 billion in assets, despite disbursements of 5 per cent every year, and achieved an unprecedented average annual return of 13.7 per cent over 25 years. The terms institutional investing and endowment investing are so closely associated with him and Yale that they are sometimes even called his method the Yale model or the endowment model of asset allocation and investing. One of the key pillars of such a successful strategy was not only the portfolio's heavy equity bias over fixed income and commodities, but also what was at the time a revolutionary idea: The thesis that the Yale endowment held at its core was that liquidity was a bad thing, as you paid a heavy price in the form of lower returns. Cash or deposits are a drag on long-term returns. This is why the Yale model pursued a heavy allocation to private markets, especially private equity (PE) and venture capital early on, and excess returns were harvested from its illiquidity premium. The idea was that, by giving up liquidity which you don't need for your long-term savings, you can generate higher returns without necessarily taking more risk, or you may reduce risk in the form of the volatility of returns. Asset allocation drive most of the return Many studies show that up to 90 per cent or more of long-term returns are driven by asset allocation. What that means is that it isn't the stocks you buy that matters, but how much of the portfolio is in equities versus other assets such as cash, fixed income, commodities and alternatives such as PE, private credit, private infrastructure and hedge funds. The systematic factors behind each asset drive long-term returns. Assessing the risk and return of each asset class determines the risk your portfolio is exposed to, and the returns generated in the long term. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up Exposure to alternative assets such as PE and private credit has been shown to lower the level of realised volatility. Many people take risks that are not compensated or rewarded, by punting on stocks or trading crypto. One must always be compensated for the risk one takes in the form of returns that are consistent and realisable. The consistency of long-term returns on traditional and alternative assets make them appropriate as core holdings in an individual or family portfolio. More opportunities in PE? As at 2024, there were 20 times more PE-backed private companies than companies listed in the public markets. Around two-thirds of all corporate revenue was generated by private companies, with the remaining third coming from public companies, including familiar names like Apple, Nvidia, Microsoft, Amazon and Google. Without an investment in private markets, you miss out on a significant part of global corporate growth. Research from Nobel-laureate Professors Eugene Fama and Kenneth French suggests that small companies tend to generate better returns because of the lower base from which they start; not investing in this category means the ability to generate excess returns is diminished. By investing in a private-market fund, you get exposure to a broader investable universe, as well as more active management of the underlying portfolio companies. In private companies, shareholders can help improve or restructure the business to create value; in contrast, shareholders of public companies don't have much control over how the business is run. With the advent of open-ended, evergreen fund structures, there is no need to take the additional credit risk of a single-vintage, closed-end fund and the higher concentration risk that arises from investing in a narrow pool of companies. Investing in a multi-manager portfolio further diversifies risks. The three main reasons for investors to consider investing in alternatives are to achieve greater diversification through uncorrelated returns; to bear lower volatility and risk; and to improve systemic returns by, for example, harvesting the illiquidity premium. The global public equities market has returned an average 7 per cent per annum over a multi-decade period. There are only a few ways to improve returns above the public-equity beta over a longer-term period. These include harnessing i) alpha, ii) illiquidity premium, and iii) leverage. There is a higher chance of alpha generation in private opportunities that are available for a smaller pool of assets. There may also be greater flexibility in achieving alpha in the absence of benchmarks, or in the case of hedge funds, the use of shorts and derivatives. It also has an illiquidity premium – that is, long-term capital that does not need to be withdrawn can demand higher returns from companies that need funding. Alternative investments tend to have lower volatility than the public markets, as PE firms would value their funds (mark to market) less frequently, often based on 'events' such as the pricing of the company's latest fundraising round. We talked about the diversification benefits of a much deeper pool of private companies that are otherwise not available in public markets. There is also greater flexibility to include sectors that are harder to access, such as aircraft leasing, ownership of sports franchises and intellectual property. Will private market assets become more broadly available? In March, the Monetary Authority of Singapore sought feedback on a proposed regulatory framework for retail investors to invest in private market investment (PMI) funds, providing them with a wider set of investment choices. If done right, we believe this is a positive step towards democratising access, making private assets available to all investors regardless of their income and the amount of assets they own. However, we feel it does require greater effort in educating those new to the asset class. A trusted financial advisor becomes even more important to ensure that the investment is suitable. Again, we must ensure that the appropriate risk is being taken and that investors will be rewarded with better outcomes commensurate with the risk they are taking. Private markets open up an opportunity for individual investors to reduce volatility and protect capital, or improve returns and outcomes for their investment goals – as long as the investment horizon matches their goals and is long-term enough to reap the benefits of investing in illiquid assets like PE. That would truly allow an institutional or endowment style of investing for all of us. Samuel Rhee is co-founder and chairman, and Hugh Chung is chief investment officer at Endowus, a digital wealth platform with over S$10 billion in client assets across public and private markets and pension (CPF and SRS) funds.
Forbes
22-05-2025
- Business
- Forbes
Is Harvard's Private Equity Selloff A Trap For Retail Investors?
CAMBRIDGE, MASSACHUSETTS, UNITED STATES - APRIL 22: A view of Harvard University in Cambridge, ... More Massachusetts, United States, on April 22, 2025. (Photo by Kyle Mazza/Anadolu via Getty Images) Harvard University's $53.2 billion endowment, the largest in higher education, is offloading $1 billion in private equity stakes, a move advised by Jefferies Financial Group and potentially involving Lexington Partners as a buyer, according to Reuters. This seismic shift in the Ivy League's financial strategy comes amid a broader trend of elite universities unloading illiquid assets. While this may seem like a golden opportunity for retail investors to access the once-exclusive world of private equity, the reality is far more cautionary. As large institutions like the Harvard and Yale endowments seek liquidity and a reduction in private equity investment, it is no coincidence that simultaneously Wall Street has been pushing to 'democratize' private equity. This push to 'democratize' private equity should raise red flags, as it may be a strategic move to offload overvalued, illiquid assets onto less sophisticated investors at a time when the largest investors in private equity are looking for an exit. Harvard's endowment, an early adopter of the Yale Model, has long relied on alternative assets like private equity, which make up nearly 40% of its portfolio, according to its latest annual financial report. This strategy, championed by David Swensen, delivered robust returns for decades, funding everything from faculty salaries to student aid. But today, universities face a perfect storm: the Trump administration's threats to freeze $9 billion in federal funding, hiring freezes, and a sluggish private equity market have created a liquidity crisis. Harvard's response—a $750 million bond issuance reported by Reuters and the sale of $1 billion in private equity stakes—mirrors moves by Yale, which plans to offload $6 billion in similar assets according to the Yale Daily News. These sales represent a sector-wide scramble for cash as endowments grapple with aging fund vintages tied up in illiquid investments. The private equity market itself is faltering. According to MSCI, private equity returns lagged behind private credit in 2024, with private equity posting a 5.6% annual return compared to private credit's stronger performance. All three private equity subgroups tracked by MSCI delivered positive but underwhelming returns, trailing broader market benchmarks due to a slowdown in exit opportunities and persistent high interest rates, which have constrained liquidity and valuations. This environment has forced endowments to rethink their heavy reliance on private equity, which locks up capital for years and offers little flexibility in times of need. Private equity has historically been restricted to high-net-worth individuals and institutional investors due to its speculative and illiquid nature, as regulated by the Securities and Exchange Commission. These investments involve acquiring stakes in private companies or startups, with returns realized through liquidity events like IPOs or sales. But as markets falter—particularly in tech—and rising interest rates, the ability to exit these investments has dwindled. MSCI data highlights that private equity funds are increasingly turning into 'zombie' funds, holding investments far longer than intended due to a scarcity of exit opportunities, such as IPOs or sales, in a high-interest-rate environment. This liquidity drought has left institutional investors, including universities, stuck with capital they can't access in private equity investments with potentially sub-par future returns. Enter Wall Street's sudden enthusiasm for 'democratizing' private equity. Regulatory changes, such as the SEC's loosened restrictions on private market access, have opened the door for retail investors through financial advisors and firms like Franklin Templeton, which owns Lexington Partners. Companies like Empower are even offering private market investments in retirement plans, per the company's recent news release. On the surface, this seems like a chance for everyday investors to tap into the high returns once reserved for the elite. But the timing is suspicious. Why would Wall Street share a historically profitable asset class with the public now, when exits are scarce and valuations are shaky? The answer lies in liquidity. Private equity investors, including endowments, are desperate to offload illiquid stakes. By marketing these assets to retail investors, Wall Street creates a new pool of buyers—less sophisticated investors who may not fully grasp the risks. Historically, private equity has used IPOs to offload overhyped, often unprofitable companies onto the public, reaping massive profits while leaving retail investors and retirement accounts holding overvalued stock. 'Democratizing' private equity skips the IPO step, directly selling illiquid, potentially overvalued shares to the public. As billionaire investor Bill Ackman warned, endowments like Harvard's may face meaningful losses on these discounted sales, as reported by Bloomberg. And retail investors could be next in line to bear the cost. For retail investors, the allure of private equity is undeniable but fraught with peril. These investments are complex, with long lock-up periods and opaque valuations that can mask underlying weaknesses. Unlike mutual funds, private equity offers little transparency, and retail investors may struggle to assess true value. In this environment, financial advisors face a steep challenge in conducting due diligence to protect clients. Entering the market now, when endowments are selling at discounts, raises the risk of buying at inflated valuations or after peak returns have passed. The broader financial ecosystem is also at a turning point. Harvard's sell-off could trigger a wave of secondary market activity, with sovereign funds, family offices, and retail-focused firms stepping in. But discounted sales may spark broader price corrections, challenging the high returns that once justified private equity's appeal. For universities, unloading these stakes provides short-term liquidity but risks locking in losses and signaling a retreat from alternative investments. Wall Street's push to 'democratize' private equity may seem like an opportunity for retail investors, but it's likely a strategy to transfer risk to a less savvy public. Financial advisors must prioritize education, ensuring clients understand the illiquidity and complexity of these investments. When Wall Street suddenly shares its exclusive opportunities, history suggests it's not out of generosity. Buyer beware: Harvard's loss could become retail investors' burden.
Business Times
04-05-2025
- Business
- Business Times
Private-market assets not a panacea for returns
INTEREST in private-markets investing has never been greater. Mutual fund giants are partnering some of the best-known names in private assets, and are rolling out funds that retail investors can access. But pointed questions are also being raised – more so at this time than before – on whether private-market assets can live up to the hype going forward. They are not a panacea for returns, and tend to underperform in a bull market. The late David Swensen, who helmed Yale's endowment fund for over 30 years, pioneered outsized allocations into private assets. Yale's allocation into alternatives (alts) remains outsized, at more than 80 per cent. One-year returns up to June 2024 came to 5.7 per cent after fees. It has lagged against a strong showing by US stocks. This is to be expected, said Yale's chief investment officer Matt Mendelsohn, 'particularly when exit markets for private assets are depressed'. Over longer periods of 10 and 20 years, Yale's endowment outperformed the median returns for US college and university endowments. Many large institutions try to emulate Yale's portfolio, but most have failed to achieve the same results. The latest data on US endowments, drawn from returns compiled by the National Association of College and University Business Officers (Nacubo), show a return of 6.8 per cent for end-2024 – just on par with the plain-vanilla balanced portfolio of 70 per cent stocks and 30 per cent bonds. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up A likely reason for underperformance is costs, as Richard Ennis, a pioneer of quant investing in the 1970s, argued in his recently published paper, 'The Demise of Alternative Investments'. He evaluated the performance of large US endowments using Nacubo data against a market index for 16 years to end-June 2024; in his analysis, large endowments returned 6.88 per cent, against a market index return of 9.27 per cent – an underperformance of 2.4 percentage points a year. A portfolio of alts, he wrote, costs at least 3 to 4 per cent of asset value a year. An institutional portfolio's total expense ratio, depending on the size of the allocation, may come to 1 to 3 per cent. In the private wealth market today, clients' allocation to private market assets is understood to be well below 10 per cent. Private banks are keen to push the needle up to 20 per cent. Meanwhile, the Monetary Authority of Singapore is seeking feedback on a framework to allow retail investors invest in private-market funds. Are private-market assets the so-called holy grail of investing? For assets that involve more complexity, higher costs and less transparency, the way forward for retail investors isn't so clear-cut, even when evergreen or open-ended funds are made available. Unlike traditional private funds which are closed-ended and illiquid, evergreen funds have a liquidity window within limits, and are more palatable for individual investors. New regime Perhaps the most persuasive argument for an allocation into private markets is the view that a 'new regime' is currently underway where correlations between stock and bonds – previously negative – are now positive, and inflation is elevated. In its 2025 global outlook, BlackRock called for a re-evaluation of the traditional 60/40 portfolio (60 per cent equities, 40 per cent bonds) because of an 'ever-changing' outlook. Investors, it said, should take a dynamic approach and include private-market assets which enable participation in early-growth companies and non-bank financing. Henry McVey, partner and head of global macro and asset allocation, KKR Global Institute, has published papers on what he calls a 'regime change', where fiscal spending is set to be higher, geopolitical risk intensifies, and inflation is stickier. In this environment, he argues for more 'control equity positions' and more active management of capital. Both can be harnessed via private equity (PE). KKR found that PE has delivered excess annualised returns of 4.3 per cent over the past three decades. It also found that the outperformance was greatest in times when public equities faltered. Of course, there are challenges. Pitchbook writes that the new tariffs, should they last, could have near- and long-term impacts on private markets. It said that lack of economic clarity and persistent market volatility would cloud deal making and put pressure on exits. 'The (tariff) plan is generally regarded as more severe than expected, increasing the chances of a recession and retaliatory tariffs. This will add to deal making hesitation and keep pressure on an already stalled exit environment.' Bain & Co, in its PE outlook report for 2025, expects the amount of dry powder at US$1.2 trillion and 'ageing' dry powder to exert additional pressure on deal making. Ageing dry powder – unspent capital held for four years or longer – has increased from 20 per cent of total dry powder to 24 per cent. Bain said that this 'suggests general partners are struggling to find first-rate, affordable targets'. Manager selection is paramount For individuals, yet another challenge is choosing the best manager. Unlike public securities, where market returns are easily captured via an index fund, the skills of individual fund managers are paramount in private markets. This is why new monies tend to gravitate to the largest funds with a proven track record. Within private equity in particular, Alisa Wood, KKR partner and co-CEO of two open-ended PE funds, says broad industry returns data masks the huge dispersion or differential between the top- and bottom-performing managers, which is as much as 14 percentage points. 'Manager selection is key. The only way to make PE work is to invest in best-in-class managers, but it's really hard to get into the best managers.' There is also a positive bias at play, she said. 'In terms of consistency of performance, the first-quartile performers tend to stay in first quartile because they typically have a proven playbook that they can execute time and again… You need to pick the best managers and then figure out how to get into those managers. That's the complicated part.' High costs In his paper, Ennis argued that high costs of a portfolio of alts have had a 'significantly adverse impact' on the performance of institutional investors since the global financial crisis of 2008. 'Alts bring extraordinary costs but ordinary returns – namely those of equity and fixed income assets,' he wrote. Hedge funds and real estate have been 'standout underperformers', he wrote. The surge of monies into alts may have also resulted in more pedestrian returns, as competition intensified for the best deals. 'Private market investing is more competitive and efficient than it was way back when. Costs, though, remain high – far too high to support much value-added investing.' But Ennis also castigated the 'agency problems and weak governance' in the supervision of institutional portfolios. 'Chief investment officers and consultant advisers who develop and implement investment strategy have an incentive to favour complex investment programmes. They also design the benchmarks used to evaluate performance. 'Compounding the incentive problem, trustees often pay bonuses based on performance relative to the benchmarks. This is an obvious governance failure.' Advice gap High costs and the agency problem are set to be minefields for retail investors, should access be allowed. Funds of funds, a multi-manager and multi-strategy offering, offer convenient access as they address the challenge of manager and strategy selection. But they also charge a layer of fees on top of already-high underlying funds' fees. The inherent conflicts of interest arising from more lucrative distribution fees warrant caution. It is an area, in addition to the quality of advice, that any framework to allow retail access should address.
