Private Equity’s Other Illiquidity Premium
An examination of smoothing and other perceived benefits of private equity that have commanded a premium fee despite more cost-efficient alternatives.
In this piece, the author discusses the appeal of private equity (PE) to investors, highlighting characteristics such as high total returns, diversification, relatively low risk, and infrequent drawdowns. However, the author questions the reality of these benefits and whether a cost-efficient substitute can replicate a significant percentage of PE's returns.
The article examines each benefit of PE and explores the feasibility of generating similar performance through a tailored portfolio of publicly traded companies. In addition, the author considers whether "liquid private equity" strategies can play a comparable role to traditional PE in investors' portfolios.
Overall, the article suggests that the benefits of PE may not be as strong as they appear, and investors should be cautious in their approach. While liquid private equity strategies may offer some advantages over traditional PE, investors should carefully weigh the risks and rewards of each investment option. As such, the article encourages investors to carefully evaluate the potential risks and rewards of investing in private equity before allocating a significant percentage of their total fee budget to this asset class.
