Monday 19 April 2021

In case you missed it – Spring seminar keynote II


For those who were unable to attend, we compiled the key takeaways of the webinar featuring professor Ludovic Phalippou of the University of Oxford Saïd Business School.

Phalippou’s research focuses on the funds allocated to private equity funds, the total returns on investments and the returns remaining after subtracting the costs accrued due to aggregate fees. This was done using data that is available to the wider public. During the webinar, Phalippou discusses the importance of which benchmark is used to determine the public market equivalent of private equity, depending on what is referenced, it could give the false perception that private equity is outperforming public equities. Furthermore, he shares his thoughts on the critical comments he received from who he refers to as “the coalition”. 

Phalippou started the webinar by addressing the misconception that his findings contradict those of Per Strömberg, who presented his research during the last Spring Seminar keynote. Phalippou agrees with Strömberg, but points to a different emphasis on different pieces of information in the two studies.

“I think [the misconception] comes from the fact that we weighed different pieces of information differently,” Phalippou explains. “For example, Per spends a lot of time talking about value creation – I do not, as I think it is not very important for the problem at hand, which is “why should a pension fund know about investing in private equity?” (…) Value creation is not crucial here. You can have all the value you want, if you pay too much for the assets, it is worthless.

Instead of focusing on value creation, Phalippou’s research focuses on fees: “At a time where prices are extremely high, value creation is under pressure. Fees are particularly important in a low interest rate environment, as their impact on return is going to be even more important than it was in the past. Fees are certain, value creation is not, compared to the price that people pay for the asset.”

Slide 12, presentation Ludovic Phalippou

After briefly going over the points that were raised by “the coalition”, Phalippou makes an interesting point when discussing the use of the S&P 500 as a benchmark for private equity. “All the fund presentations in 2004-2008 had the S&P 500 as a benchmark. Today, none of them use it as a benchmark, they use MSCI World instead.” 

“The performance of the S&P 500 in the 2000s was terrible and unheard of – the large cap US stocks had terrible returns between 1998 to 2008, now their performance is more normal. Everyone was using the S&P 500 as the benchmark during that time, because it had terrible returns. It is very easy to beat something with 2% returns. Now that the S&P 500 is back to normal, they started using different benchmarks”, Phalippou explains.

Later in the session, Phalippou discusses the comparison between global equity and global indices, such as MSCI World.

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Phalippou: “MSCI World is making private equity look good because of public equity’s poor performances in markets outside of the US. If you compare private equity and public equity in the United States, their performances are 1-to-1, the same goes for emerging markets.

The outlier is European private equity, which beats MSCI Europe. This is because private equity in Europe is very different from public equity when it comes to industry composition. In terms of industries, public equity consists of a lot of large food companies and oil companies, the kind of industries that dominate in Europe. They have nothing to do with what private equity invests into in Europe. These public industries have performed poorly over the last 15 years.

Furthermore, in private equity, half of the money in Europe is invested in the UK. On the public market, the UK only makes up 23%. The country weights and currencies are completely different. If you put all of this together and compare private equity to public equity using MSCI World, you are comparing apples with oranges.”

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