Wall Street problems

This is generally right, especially adding in my pet theory of sales guys rising a little further than they ought to.

New York Times has difficulty with private equity

I don't get it.  The article says that private equity portfolios are being sold at between 29.3 cents on the dollar and 51.58 cents on the dollar, measured at net asset value.  I believe some discount so I would accept these numbers and trust the article. 

Except for the baffling sentence two paragraphs later:  "But what happens if Stanford is able to sell its stake at only 50 cents on the dollar, for example, when K.K.R. is listing it at 80 cents? If other endowments hold similar stakes, what happens to their value?"

Huh?  Isn't KKR's listed stake the net asset value?  Perhaps the article means 29.3 cents on the invested capital?  But who in their right mind is applying a discount off of entry price rather than their judgment of current value?  What is this "dollar" referring to?  In the KKR context, I think it is of invested capital.  In Stanford's case, I think off of KKR's reported value (which is lower than entry value).  But, of course, I have no idea because the article is sloppy.

Notwithstanding private equity's larger mindshare and increased column inches, the press still has a long way to go before it understands even the basics, I think.

PE in the crosshairs

Clearly, the NYT has decided that driving while texting and private equity are ripe targets.

Although I found the reporting a little one-sided on the private equity story, they did manage to find one of the more awkward series of deals (mattresses).  Of course, the story does not present the basic underlying principle of whom the funds work for and why (their investors and to maximize their returns, respectively) to balance the story and its presentation of the workers and bondholders' situations.  It's not clear that the results would have been different in the hands of any other owners (i.e., regardless of the identity of the owner (except, perhaps for an ESOP or the government), the same thing could very well have happened).

I think the more interesting story (especially if the NYT really wanted to undercut the basic principle part I note above) is that there were a series of fund-to-fund sales with overlapping investor bases.  It would make the story far more forceful (if complicated) and allow the finger to be pointed solely at the sponsors (if unfairly).

fund management and alternatives

This week's Economist has an editorial regarding funds that says:

"A survey by Watson Wyatt, a consulting firm, found that the cost of running a pension scheme increased by around half between 2003 and 2008. That was because schemes allocated more of their portfolios to hedge funds and private-equity managers, which charge much higher fees. Chasing performance by paying higher fees might work for individual investors, but in aggregate it is doomed to fail. The return to the average investor is the market return minus costs; if costs rise, returns must fall."

I don't think this is quite right if hedge funds and private-equity managers are investing in under-represented parts of the market. In that case, although the statement "The return to the average investor is the market return minus costs" is true, it unfairly treats the "market" as being the entire market even where it is not.

PE Secondaries

Have been thinking about PE secondary sales (Harvard, UVA, etc.). And have a thought - assuming PE returns are largely a function of vintage, and assuming now is the right time to begin putting money to work, could it be that the sellers are actually not exiting PE but rather freeing up capital to invest at the right time? For a public stock, future beliefs about the industry or asset class determine whether to hold or sell a position, regardless of prior losses. For PE limited partnership interests, different years and funds are not fungible and so investors need to make a new purchase to get exposure (can't simply hold on to old investments and ride out the volatility). So, although there may be some increase in value for 2006 vintage funds, better to get in the 2009-10 funds even at the cost of writing off a large part of the value of recent investments. Just a thought.