[HN Gopher] Why does private equity get to play make-believe wit...
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Why does private equity get to play make-believe with prices?
Author : jpn
Score : 41 points
Date : 2023-01-07 20:12 UTC (2 hours ago)
(HTM) web link (www.institutionalinvestor.com)
(TXT) w3m dump (www.institutionalinvestor.com)
| Karellen wrote:
| > It's hard to avoid the idea that my confusion [...] is resolved
| by noting a principal-agent problem where the PE managers get
| paid a ton so intermediaries can then report unrealistically rosy
| assumptions and unrealistically calm returns. The chickens come
| home to roost only if long-term returns no longer beat public
| markets [...] But both parties involved, principal and agent, may
| be assuming that in ten-plus years that'll be someone else's
| problem.
|
| So... because "rules are for the little people, and I've got my
| commission, so fuck you that's why"?
| pixl97 wrote:
| He who has the gold makes the rules!
| 1270018080 wrote:
| If you had $10 billion in cash and had to allocate it, how much
| would you put in private equity? What is your incentive?
|
| I see the appeal to private equity as a walled garden. Only
| elites get to invest in startups, and keeping the masses out
| keeps prices down (supply and demand). Depending on your outlook,
| you could say public markets are a bit of a ponzi scheme too. So
| dumping your private equity out onto the market with an exit lets
| you get in at the beginning of the scheme. Another big win.
|
| The author says there are too many people in PE and the premiums
| are too high, but relative to public equity, I am really not
| sure. The author also mentions how bad the liquidity is, and that
| should also move prices down even further. So as far as economic
| opportunity it still seems like a good deal.
|
| That being said, if I actually had $10 billion, I still don't
| think I would put more than 5% in because of how often startups
| fail and how bad the liquidity is.
| chrisgd wrote:
| Private equity generally buys EBITDa positive businesses from
| each other and founders. Highly unlikely PE marks many
| investments to 0, rather just less than purchase price.
| nimzoLarsen wrote:
| PE shops get paid based on their assets under management (AUM).
|
| If they write down their investments, their AUM drops, and with
| that the fees they charge.
| 1jbdg wrote:
| Their fee is based on committed capital not marked up AUM
| jupp0r wrote:
| So some investors believe in whatever PE tells them companies are
| valued at. The market is not out of the equation here because PE
| firms are competing with other forms of investment for investors
| money. If they are much better at valuation than public markets -
| good for them (and for investors). That's how they get to play
| make-believe.
|
| When private companies eventually are sold via IPO or privately,
| all rosy estimates meet the harsh reality of what somebody is
| willing to pay and all overly rosy estimates are exposed. The
| reputation of the PE firm will reflect investors ROI (and they
| are usually pretty transparent about this).
|
| Alternatively, some sort of profit sharing can yield long term
| profits from just holing private shares.
| PicassoCTs wrote:
| Do you really still believe that? What if you have friends that
| control significant portions of the investment in the markets
| and you can get "bailed" out with those relations?
| SpicyLemonZest wrote:
| I have no doubt that some people find it easier to get money
| than others. But there's a lot of high-profile failures, most
| recently WeWork, which pretty clearly show that having lots
| of friends in powerful financial institutions isn't
| sufficient to get the public market valuation your investors
| want.
| jholdn wrote:
| Isn't there also a component that PE is incentivized to work for
| existing investors more than new investors. If they mark down an
| asset in a bear market and a new investor puts money in they will
| potentially dilute future profits for existing investors by
| possibly letting them in at a lower price. If the market
| recovers, the new investor sees all those gains. If the asset
| isn't marked down, those gains are shared with existing investors
| (b/c the new investor had to pay above market).
| cs702 wrote:
| TL;DR:
|
| Because investors like pension funds and college endowments do
| not want the write-offs.
|
| It's in their short-term interest to pretend the make-believe
| valuations are real. The numbers look prettier that way.
|
| They keep their fingers crossed that everything will turn out OK
| in the end.
| oneoff786 wrote:
| This feels like a bad take unless one has some data on how
| often it turns out OK. If it frequently does, the implications
| of the first bit seem off
| cs702 wrote:
| Whether the declines in valuation turn out to be permanent or
| temporary doesn't matter, institutional investors are
| incentivized _not_ to recognize them in the short run.
| funstuff007 wrote:
| They want held to maturity accounting treatment on all the
| things.
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