Asset owners’ next battle

One response to “Asset owners’ next battle”

1. 

   Hamish Quothqhuan

   June 2, 2016

   Thanks for the article to tell us what we already know. For at least the last decade that’s what LPs have been doing. But its confused. Infra and PE and private RE all have quite different (and rigorous industry standardised) valuation metrics and processes. You are correct that a range of values may be more valuable than a single IRR, but in the case of infra, the DCF models are extremely sensitive to even small changes in assumptions and are predicated on a long term hold. Short term exit can radically alter economics/tax outcomes for the LPs rendering the assets impracticality illiquid. PE metrics typically calibrate to stock market sector valuations or verifiable transaction metrics. Fairly rigorous and typically standardised across the industry. ILPA and various industry VCAs work to improve this. But the key prejudice of this article ignores the fact that some PE managers are demonstrably good and persistently deliver outsize returns and continue to do so. Furthermore, some (the better) LPs exercise a selection bias in their programs that solve for exposure to the better GPs -academics hate this and choose to study the average, refusing to allow for positive selection skills, but in an industry with a wide dispersion of outcomes the average is next to meaningless. Nevertheless, recent studies show the average still and relentlessly out performs listed. That’s because there is a positive feedback loop (survivor bias), positive selection skills from LPs and persistence amongst good GPs. Studies of institutional programs that are well constructed deliver great returns, including that of CALPERS who have no plans to ditch PE. Their HF decision was based on capacity problems. The article is out of date for poorly informed of actual industry practice.

   Log in to Reply