Why is Yale and Harvard getting out of private equity?

That's a good question.

I am not entirely sure, but I think it's a combination of things.

I think first of all, are you know Harvard and Yale both have some liquidity issues.

They probably felt they were a little too illiquid and so by selling some of their private equity portfolio they get more liquidity.

I would guess too they looked at their portfolio and they saw some funds that they were either not too happy with or were happy to get out of.

And third, I think the bid ask spreads I imagine in the secondary market were tight enough that selling they were able to sell it at what they thought were reasonable values.

So I'd say those are probably the three things that have led to the sales.

If Yale gave you a call, let's say Matt Mendelson, the CIO gave you a call and said, how should I get liquidity in my portfolio?

What would you advise?

Yale, I think allocates too much to hedge funds.

Hedge fund performance has not been great over time relative to other things.

So first of all I can't introduce my hedge fund exposure.

I also would say the same thing about infrastructure and real estate.

So I would take my allocations a little different from Yale in order to get some liquidity and then I'd be go ahead.

One of your research papers took a look at buyout, private equity returns between 2000 and 2017 and found that on average buyout outperformed by 4% versus S and P 500.

Tell me about that research and how did you go about ascertaining that performance?

This is all in ongoing and I'm going to give you the most up to date numbers in a second.

But the research started many, many years ago.

No one really knew anything about private equity performance and Antoinette Shore who's at MIT and I wrote one of the first papers looking at private equity performance.

It was 2005 and we used data from venture economics and we came up with a measure that is called the Kaplan Shor public market equivalent that allows you to compare apples to apples private equity whether it's buyout and venture with whatever index you choose, we chose the S and P 500.

It turned out the venture economics data were bad.

And I'm going to come back to that later when we talk about LUDA.

Since then, I've been using the Burgess, now MSCI data, which are the absolute best data on private equity performance.

They're much better now.

Burgess gets their data from limited partners, mutually institutional, so it's pension funds, sovereign wealth funds, endowments.

And because those data sources are LPs, there's not a selection bias.

They're getting the data from the buyout funds, the venture funds, whatever it is, and Burgess takes the data and then we have access to it.

So this is now very, it's data that are as clean as you can get.

They're still not perfect because you don't know everything that's out there, but this is the best data there is.

And so the most recent data if you look at buyout funds in North America from 2000 to 2019 vintages and those are good vintages because you know the data are through the 2025.

So the 2019 funds are at least five years old.

And if you look at how those funds have done as of today and the more recent funds there's still some you know they're not fully realized.

It could move a little bit because of you know net asset values, but they are currently running at three sixty basis points above the S and P 500 over that period.

And or everything raised 2,000 to 2019 as of Q1 twenty five is three sixty basis points over the S and P 500, which is spectacular and it's why so much money went into private equity.

If you compare it to the Russell two thousand, which is maybe a better benchmark for private equity buyout funds, because they're not buying big companies, they're buying mid cap, it's four sixty basis points.

So the performance has been very good.

Private markets, because there's lack of standardization and there's all sorts of biases, you mentioned one of these biases, LP drive data from GP derived data.

There's also all sorts of marketing biases, standardization biases.

It's actually incredibly valuable to have standardized data.

So you created this Kaplan Shor index.

Tell me about what that index is and how did you normalize data from private equity to the S and There are two ways to look at it.

One is sort of cumulatively, which would be sort of like a market adjusted multiple of the fund.

So what it basically does is says okay if the private equity fund calls capital let's say it calls a hunt calls $100,000,000 we put $100,000,000 into the S and P 500 that day.

And then over the life of the fund, when the fund when that money comes say we got a $300,000,000 realization five years later, we compare that 300,000,000 to what you would have returned if you put the $100,000,000 in the S and P 500.

So if the S and P 500 went from 100 to 200 over that period and you got 300, that's a PME of 1.5.

You have beaten the S and P 500 by 50%.

The S and P 500 went to 400.

Well, now it's 300 divided by 400.

Your PME is 0.75.

You have underperformed the S and P 500 by 25%.

So the public market equivalent is basically saying apples to apples, you put your money in the S and P 500, you put it into the private equity.

If it's greater than one, you've done better than the S and P 500.

And that number for private equity for those vintages I mentioned is 1.13.

So it's 13% cumulatively better than the S and P 500 and the S and P 500 went up quite a bit over this period.

You can then annualize it to something called a direct alpha where you're basically taking that 13% over the life of the fund and doing an IRR on the excess and that's the three sixty basis points that I mentioned earlier.

Something like 15% versus 11% would be a back of the envelope guess that.

When you look at the data 02/2019, how much roughly is the S and P growing on a yearly basis versus buyout over nineteen years?

So I would say it's sort of 15 versus 11.

So you would have done and that that's about the 400 basis points that I mentioned.

So using the rule of 72, it's roughly doubling every five years versus doubling every six and a half years, which doesn't sound like a big difference, but it certainly compounds dramatically.

It certainly compounds.

Three sixty basis points a year is a big difference.

Out of curiosity, do you also add dividends into the S and P 500 as well?

Yeah.

So the S and P 500 and that you absolutely have to do that.

So the S and P 500, it is includes dividends, which are roughly 2% a year.

And the buyout fund performance would include all distributions.

So it's really it's an apples to apples comparison which is why it's and it's very simple to calculate actually which is why it's such a nice we thought it was a nice metric to use.

One of your colleagues at Oxford, Ludo Filippo, is this private equity critic, just stating his bias, and he believes that a lot of these metrics are gamed, IRRs can't be eaten and there's a lot of gamification from the private equity industry.

Why is he wrong?

He's wrong in that he is actually misleading on a number of things and he's wrong on a number of things and he's actually been wrong for quite some time.

I'll say something nice about him later that there's some things that he's right about.

So these numbers that I gave you are based on cash flows.

So these are not IRRs, these are not things you can't eat.

These are based on cash flows with the exception of the unrealized investments that are still in the funds, 2017, 2018, 2019 vintages, those aren't fully realized.

So the numbers I gave you could move a little bit because we're basing what's left in the portfolio on the marks, but everything else is realized.

I mean this is 2000 to 2015, these things are very realized and those the numbers and those have been the numbers.

So to say, some people say there's volatility, know people playing games with volatility, playing games with IRR, those numbers I gave you those are quite real.

So that's number one, to say they're not real is wrong and Ludo doesn't say that.

The second thing that he's done on a number of occasions is not done in apples to oranges calculations.

So what he'll do in a lot of these things is he'll put private credit, he'll put real assets in with the buyout and the venture, and then he'll compare them to the S and P 500.

Well, buyout and venture absolutely compared to the S and P 500.

Private credit, are you kidding?

That shouldn't have an S and P 500 type return.

And then real assets and real estate and infrastructure, I think you can debate.

But if you take out the private credit, the real assets, the infrastructure, these results are super strong through the 2019 vintages.

So he sometimes mixes apples to oranges and in several of his things he used the least favorable time periods to private equity.

And but if you use this long period 02/2019, what I just told you is what you get.

So there's just no way to say buyout performance hasn't been very good through those vintages.

Now where he may turn out to be right, which is we'll see are the more recent vintages.

So 2020 to 20 '22 vintages which invested a lot of money in the craziness and around the pandemic, where prices got very high.

Those vintages right now have PMEs of about 0.98 and the direct alpha of minus 1% versus the S and P.

So they're coming in S and P like at the moment and they could end up lower.

What's interesting is they're still beating the Russell.

So the Russell, they're beating the Russell by like the PME is 1.22 that means cumulatively 22% better and an 8% annualized outperformance.

So if you think the Russell is the right benchmark, those vintages are going to be okay.

If you think it's the S and P 500, maybe, maybe not.

So maybe Ludo will be right.

But what I'm doing and have done consistently is apples to apples, look at the time periods, be very clear about what you're looking at and that's what I've done.

The other place where I think he's again I think I agree is real estate and real assets have not performed so well and on an absolute basis and relative to the S and P and infrastructure probably not as well.

So if I were advising an endowment I would steer clear or not do very much of infrastructure or real estate.

And I would you know stick to you know, what I think is real private equity.

And you advise that because real estate has worse performing returns.

Even if it adds some more diversification, real estate and infrastructure on a expected value, you're actually lowering your returns.

What about diversification?

So diversification is the infrastructure infrastructure I think is the jury is out.

The returns have been low or if you look at it relative to the S and P, the returns have been low.

If you look at it relative to some infrastructure index and public companies, it looks better.

And so you kind of have to decide what you're doing with infrastructure.

Are you looking for return or are you looking for diversification?

The real estate even sort of underperforms the real public real estate indexes.

So the real estate has really not been a great place in private equity.

I also the other thing I think about is you're paying these fees which are you know not trivial you know whether it's two and twenty or you know one and ten depending on the asset class and you're paying those fees because the PE firms are adding value.

And so where are they going to add value?

Know on the buyout side you know they're doing it right and a lot of these companies, the private equity funds try to do it right.

They're adding real operational value to these companies.

Infrastructure, I think it's a little harder, but you might be able to.

Real estate, what are you doing, right?

You're buying low, selling high.

I'm not sure how you add value to a building over somebody else.

So I think the value added is potentially much higher on the buyout and venture capital side.

So there's some hope or expectation that they'll earn their fees.

I think it's harder in some of the other asset class.

When the capital short index is comparing buyout to S and P 500, you're doing on a net basis.

So what the LP would get, not what the private equity Absolutely.

And that's a very that's very important.

It is all it's net of fees on the private equity side.

And on the S and P side, actually, use the S and P.

So if you think there's a little bit of fee or a little bit of friction, we're kind of biased against the private equity by just using the S and P 500.

Although you can, you you buy an ETF, the fees are very low.

I'm not some kind of private equity or venture apologist.

I try to look at the market, although I have a bias.

I do think it performs better.

It's good to see that the data shows that.

But it seems to be the wrong way just because S and P has had a five year run.

If you really double click on that, that's the magnificent seven, you know, the the Tesla, Microsoft, Apple, Meta.

And maybe now they're slightly over performing by 2%.

Doesn't mean that it was a better decision at the time of investment.

How far back does this data go and how conclusive is it over a multi decade timeline?

You're absolutely right.

And that's why the Russell is interesting, right?

Because the S and P has crushed the Russell.

And going back to Falapoo and what also some other people say about private equity.

They used to say in 02/2005, 2010, oh, buyout investing, that's small cap value.

If I just leverage small cap value in the public markets I'd outperform.

Well small cap value has been terrible the last fifteen years and it's been crushed by the Russell Russell small cap.

Russell value has been worse than Russell which has been worse than S and P five hundred.

So you kind of have to think about what the right comparison is.

And then I think you are getting diversification, which I think is your point that when you invest over the long haul, there are going to be some periods where one asset class outperforms the other.

And as long as they don't move exactly together, you should get, let's say they have the same return, not a better return, but they're moving differently by investing in more than one asset class, you're getting the same return with less risk.

And so that's where certainly, if you put a lot of money into buyout funds 02/2019, you way outperformed even though over the entire period, even though you didn't outperform over every individual period, which goes to your next question going forward, what makes sense?

That's where it's really it's super hard because it's a lot easier to look backward than it is to predict the future.

You have to come to some guess expectation, what is this asset class going to do in terms of return relative to say the S and P 500?

Is it uncorrelated or not perfectly correlated?

And then the right answer is, if you think these asset classes have similar returns or private equity might be slightly higher, then you allocate to each of the asset classes, which is diversification.

How much is S and P correlated with buy up?

This is sort of the shocker or it's surprising is they're not perfectly correlated.

So you definitely get diversification benefit from holding buyout and the S and P 500.

And you can see that from what I just showed you buyout outperform those vintages through 2019 and buyout has underperformed probably 2020 to 2021.

So they're not moving in lockstep.

So and the returns have been higher on the buyout so you get some higher returns and you get diversification benefit.

The other question people ask which is I think is buyout just a leveraged investment in the S and P 500 and if it were a leveraged investment in the S and P 500 you would see two things.

Number one, you would see them move in lockstep which you haven't seen them do.

I just told you they didn't move in lockstep.

You would also see a beta well above one and what a beta is, is how the returns on a private equity fund move with the returns on the S and P 500.

So if they were, you were just the buyout fund was just like the S and P 500, the beta would be one, if it were a leveraged investment in the S and P 500.

And we think buyout firms probably have 5060% leverage public companies 10%, 20%.

So that'd be like a 40% difference, you'd see a beta of 1.4 or 1.5.

And you actually see betas of one, when you estimate based on and this is based on cash flows, marks.

So they have kind of the same risk as the S and P 500.

They don't move like the S and P 500 and that gives you diversification benefit.

Double click for the audience.

One of the most important things about Burgess and LP driven data, one is it's driven by LP, so there's no survivorship bias, and there's no GPs only sending data in when it's positive.

The second one is this aspect of DPI.

DPI is ground truth.

You could hem and haw for twenty years, say, I'm good.

I'm bad.

You could under per understate, overstate.

The proof proof is in the pudding.

What dollars do you return back?

That is an objective measure.

So that's what you're focused on, which I think is is great.

The the marks themselves are very interesting.

There seems to be a bias depending on vintage and manager, whether somebody would overmark or undermark their, TVPI.

On the overmarking, they wanna go they're going into fundraising cycle.

They wanna raise capital.

On the undermarking, it's just the rule of conservatism.

You don't want a Yale endowment that gets a 1.75 x mark and then export is 1.7 x.

It just doesn't make you look good.

So a lot of established managers don't like that.

But I wanna go into the data, not in terms of narratives or your personal views.

What does the data say when it comes to whether private equity buyout and or venture managers undermark or overmark as a general rule?

And also in which cases does the data show that one or the other happens?

I've written two papers on this at least.

So number one, historically and this is before you know, the 2021 period where they, they, you know, went, you know, into deals at high valuations.

Historically, on average, they undermarked a little bit.

So this is your point that they want to be a little conservative, right?

And then the times when you do see them being a little more aggressive is when as you said when people are fundraising and there are two things that go on when people fundraise.

People tend to fundraise when they're top quartile.

So when you fundraise, you have a great realization, something good happens, that's when you go and if your fund is not doing well, you don't fundraise, you wait until it is doing well.

So it's pretty amazing when you look at who raises funds.

There are like very few bottom quartile or even third quartile funds.

It's mainly top quartile and second quartile.

And what that means is you know when you fundraise and you compare yourself to other funds that were raised at the same time as your previous fund, you know you're ranked in quartiles by the Burgesses, the pitch books, the Cambridge's and people go when they look good relative to their you know comparison set.

So people tend to go when they've had good performance and then the poor performers tend to write their assets up a little bit around fundraising.

So and people are aware of this.

Mean you know if you're an LP, you understand and you should be looking at the unrealized investments in the previous fund to see the extent to which they're doing that.

I think LPs understand that.

So the first two questions you said, what is the you know, what do people do they basically as you said, the marks historically are a little conservative.

They get less conservative when people are fundraising.

And that's the you know what you see at the fund level.

The people now saying that the marks everything's overmarked is probably comes from that 2021 period where they made a lot of investments at high valuations and they haven't fully written them down.

So we'll see what happens going forward, how much of that turns out to be over marked.

And I think it's too early to tell obviously on the research because you got to wait and see how those what valuations those investments get sold at.

A very famous manager, I no longer repeat his name because it's not the best quote attributed to him, but says that asset management is about having average return and great customer service.

Now, clearly, it seems like it's people don't fundraise when they're in third and fourth quartile, but to what extent is that true that if you have median returns and just great customer service and great LP management and maybe great transparency, whatever else you would group in that bucket, to what what extent do you see funds that are able to do that continue to survive and thrive?

So I won't name names because I could but I won't at least initially is if you look at the performance of the mega funds that were raised post great financial crisis, vintages 2009 to 2019.

And look at mega funds, were more than $10,000,000,000 Those funds actually their PMEs are lower than the average buyout PME.

And I think some of them have performed S and P like.

And as a role as though they're a little overall they're a little bit over the S and P.

Some of them are S and P like, and they still raise a lot of money.

So the mega funds, think are as a class in that bucket where their performance post GFC has not been as good as the middle market folks.

But they've continued to raise a lot of money and they've delivered, okay, overall, somewhat better performance than the S and P 500, but not as good as some of the others, but they give probably give good customer service.

They also allow you to write big checks.

So there's an economy of scale.

And again, we'll see whether that continues over time as people say, Gee, the returns here are less than the returns at some of my alternatives.

You're a great researcher and you don't like to speak off the cuff, but if I forced you to guess why LPs continue to invest into these funds, what would be the one or two factors that you think is driving LPs to invest in these mega funds that are underperforming S and P 500?

There's I'm going to give a positive caveat to that.

Even though the fund, let's say the fund is S and P 500, they also get co invest rights and in a number of these funds, the larger investors.

So and on the co invest, they're not paying fees.

So the blended, you know, and P 500 on the fund and better than S and P 500 on the co invest, they're beating the S and P 500.

So I think I'll pull that back a little bit that the larger investors will beat the S and P 500 less than they would have on sort of the smaller mid market buyout funds.

And I think that's probably the explanation.

If you're a large investor, big pension fund, big sovereign wealth fund, who do the co invest, they're going into the mega funds because that's where they can put the money to work.

That's not an irrational thing for the large investors.

For somebody, think for an endowment that's you know, a $10,000,000,000 endowment, then maybe you want to go somewhere else for the, you know, you're 100,000,000,000 trillion dollar investor, then then it makes perfect sense.

Is there a back of a napkin way to convert a two and twenty into a percentage, a annualized percentage?

Yes, there is.

You have to tell me what the gross return is to turn it into net because that as the gross return gets bigger, the spread gets bigger.

So take a 25% gross, which would be a very nice fund, 25% gross is more or less 3x gross.

The 3x gross, 25% gross turns into like 19 net.

So that'd be a About 6%.

Yep.

Annualized fee.

Fee.

Absolutely.

Said another way, if the fund is doing a 19% and you were accessing co invest, let's say that you weren't adversely selected, you would be be getting another 6%.

Correct.

So quite so if you were going apples to apples to S and P five hundred and you were even now with the co invest, you're 6%, and maybe if that's half of it, you're 3% if you have one.

Correct.

Correct.

And I think people say it's like co invest like a quarter to 30%.

So you take, know, 30% of the 6% be 1.8%.

That would be sort of industry wide.

So one of these means in the market is large buyout because there's no the the leverage is not as attractive.

Maybe there's the same access to leverage, but the interest rates are higher, is almost inferior to S and P 500.

Small buyout, there's still like this operational value add that you could do, and you could have multiple expansion, all these things.

I'm asking you to project into the future, which is not something you typically do.

But to what extent do you believe in that meme, and and what are your thoughts on this?

You've got mega, you got middle market, you have lower middle market on the buyout side.

All of them, I think have have invested heavily in trying to add value to their companies.

And I think that's that's the big change over, you know, when I started, so I started teaching private equity in 1996.

And I would regularly have people in class or I'd have GPs in class.

And I would I had a framework as to how I evaluate deals.

And one of the pieces of the framework is how do you improve the business.

And then another piece of the framework is what's your edge or what's proprietary about you doing the deal rather than somebody else.

And it was I always it was sort of bizarre.

Like would ask them that and then half the time they would say, well, what are you talking about?

I don't do that.

About thinking about why, what's my edge or why am I doing the deal?

And I thought, gee, that's kind of weird.

I would have thought of that's the first thing.

Now I ask that question, it's the first thing they think about.

So the world usually changed that in February, that was a huge advantage if you did that.

And I have several former students who did that and have very successful private equity funds.

And now it's table stakes.

So everybody's doing it.

So the world is more competitive across all the asset classes, but they're all doing it.

So the good news is when they buy a company, they're buying it with an idea, here's how I'm going to make it better.

Now the question is, can you make money doing that because you're competing.

And so you're competing against other funds who are doing this.

So that makes it harder to have excess returns.

So now let's look at the different parts of the market.

The mega funds, the hardest part for them these days is exiting, because they have, number one, it's hard to if you've done a mega deal, it's hard to sell it to another private equity firm, because the deal is too big.

Strategics are tricky for antitrust reasons.

So even though the administration has changed, it's not clear that antitrust is going to be a lot less tough, it'll be less tough, but but there's still, you know, antitrust risk, you can go public, but going public is harder these days, because there are fewer IPOs for whatever reason.

And then once you do go public, it takes a long time to distribute because you're now if you own 70%, 80% of the company, it's hard to get all that out.

And so and then you've got continuation vehicles, which they're here because of the difficulties in exiting, but it's still for the mega funds, it's still they're very, very big checks.

So the mega funds, their real challenge is going to be figuring out how to exit deals at decent valuations.

So I'm like I'm a little nervous about the mega funds for that reason.

The middle market I think is better because they can sell in, they can sell to other private equity, they can sell more easily into the continuation vehicles, the strategics probably less antitrust and IPO probably less traditional.

And then the lower middle market, I think is still the most attractive because there's a little less competition for deals.

I think you can do more with the companies and it's a lot easier to exit.

The problem with lower middle market, it's hard to put a huge money to work because the funds are half a billion as opposed to 5,000,000,000.

So that's that's how I view looking forward.

I would say that the other thing that's positive about buyout is that the buyout funds, the GPs are still underwriting to 20%, 25% IRRs to 2.5, three times gross.

And so even if they don't, they do the deal, they don't hit that number, the returns are still likely to be okay.

So I like the risk return on buyout in general skewed a little bit toward away from the megas.

You've been teaching private equity since 1996.

Obviously, you've had students and you're like, oh, I think he's gonna be very successful, and he was not successful.

Maybe she was not supposed to be very successful.

She was successful.

What characteristics do you find that in retrospect, what are some of the patterns that you find in retrospect among your students that are predictive of them being successful in private equity?

How you do in my course is a very good predictor.

And reason, and I can tell you the people who have been very successful private equity investors, not exclusively but with a high correlation did well in my course and I'll tell you why.

Number one, my course, it's a case course, venture capital and buyout and half your grade is class participation, half your grade is a final.

So to do well on the final, there are really two pieces of the final usually.

There's like an analytical numbers part.

And then there's a big picture like do you get the economics, the big picture.

To do really well on the final, you gotta see the big picture and you have to be able to do the numbers.

Well, those are pretty important to being a good investor, right?

Got to get the numbers right, but you got to see the big picture.

Then on the class participation to do well there, you have to have a couple of things.

First, you have to be aggressive.

So you have to raise your hand and get out there.

Second of all, you have to be articulate and be able to explain what you're thinking.

And I think that is also very useful for private equity because you've got to be able to explain what you're doing to management teams and to LPs.

So if you have those characteristics, you're aggressive, you're articulate, you can do the numbers and see the big picture, those are those are four pretty good pretty good characteristics.

When we last chatted, you mentioned that when people are scared to invest in private equity, it's the best time to invest.

Outside of the obvious supply and demand dynamics, tell me how that actually plays out in the market.

I'm gonna caveat this that it's hard to know when you're exactly at a peak and I wrote a paper on this saying that at the time you can't always tell, but when you are at a period like 2,000 in venture, the amount of money in venture was crazy, that was not a good time to invest in venture.

The vintages in buyout that have been sort of the mediocre performers, seven, eight those vintages are you know, S and P like slightly better.

That's when a lot of money was going in and twenty twenty twenty one as well, a lot of money went in, it was you know, big pickup.

And those vintages, know, as we saw are not looking so great.

And then on the venture side you had people in 'nine saying the venture capital was dead, it's never going to go anywhere and those vintages were awesome.

'nine to 2013 or 'fourteen on venture.

You know buyout people thought was dead in 'two to 'four.

They thought it was dead in 2010 to 2014.

So you have these periods where a lot of money is going in and particularly after a couple of years when a lot of money has gone in, those are vintages that are historically not good.

And then on the flip side, vintages where there's not a lot of money going in have turned out to be good vintages.

That looks to me like supply and demand.

And again it's not perfect because Venture like in '97, '98 was higher than it was in the previous years.

And so those vintages actually turned out to be very good.

But then the next couple of years was an amazing amount of money.

Those were the bad vintages.

So it's not perfect because you can't always tell exactly where you are on the curve.

And we're by the way at a period where the buyout is actually down a little bit relative to the last few years.

Ventures down a little bit too.

So to your point, I think earlier, you had the 2021 stuff that was very people did deals they shouldn't have done.

There's this indigestion period.

We're kind of in a period where people are being mixed or a little negative.

And that may continue if the marks that we see if you know when they start selling they those valuations come down a little bit.

So it'll be very interesting to see whether that's predictive or not.

It's easy to see when something's overheating goes down because you see the withdrawal.

It's harder to predict when something's at the top until after because sometimes there's this bull run.

But to your point, if something keeps on compounding by, let's say, a TAM of 30% for many years, you could predict that maybe it won't go down next year.

It'll go down in the next couple of years.

Although that's also difficult because Venture had this bull run from 2008 to 2021 essentially.

If it were easy if it were easy, you know, I'd be running a hedge fund.

But what I would do you know in in this is rather than riding up and down, just sort of keep your allocations constant over time.

I mean that's the way to sort of you'll put a little bit more to work in the bad year, in the low years, put a little bit less to work in the overheated years.

The analogy is if you wanna be top decile, you you pick the the bull in the bear markets, which you could argue it's possible or not possible, probably closer to impossible.

But if you wanna be top quartile, you just stay in the market.

You just keep on investing, and that that's the investors that's done really well.

One of the most absurd ideas to me on this private equity or venture capital is there seems to be this assumption that you have to invest in a certain valuation.

So if I'm investing in venture seed, it has to be at 20,000,000 versus this much more real dynamic, which is supply and demand.

So venture is very unfavorable, you're investing at a lower valuation.

So clearly, at some valuation, it makes sense to invest in venture.

So it's not a question of whether it's it's good to invest in venture or not.

It's whether there's more good opportunities in capital that is chasing it at the time.

In other words, it's not whether it's a good year, bad year to start a tech company.

It's whether other people believe that and kind of the game theory between other investors in the market.

Look.

If you if you invest in the same deal at at a 5,000,000 valuation versus 50, your returns are gonna be a lot different.

I can't let you go without asking you about to normalize the data for venture against S and P five hundred over the last several decades based on LP data, not based on GP data.

So I didn't say something earlier that that's well worth saying.

There's some some new research that uses data from Atapar and Atapar basically is a platform for family offices and wealthy individuals who invest in a lot of funds.

And what the Atapar data show is almost identical to the Burgess data.

So the good news on that there's two pieces of good news on that for your the people listening is number one, the Burgess data seem right.

Atapar, it's a different sample.

It's family offices, wealthy individuals.

The returns that I just told you and will tell you are basically the same in Adapar and Burgess.

That's one.

Two, it seems like the family offices and wealthy individuals are getting into the same types of funds.

So you're not adversely selected versus the institutions, what the family offices and wealthy individuals get into.

So if you're going to do this, that's good news.

Venture is much more variable than the buyouts side.

So venture has had periods where it's well outperformed the s and p 500.

And it's had periods where it hasn't.

And so if you look at, for example, 2009 to twenty seventeen vintages, Venture did spectacularly.

The average PME is like one point two five one point three versus the 1.15 or so for buyout.

On the other hand, 20 to 22 vintages, they're underperforming the S and P 500 by by quite a bit PMEs are about 0.8 or 20% worse than the S and P 500.

And of course, you had the mid to late 90s.

The venture was amazing because of the .com boom.

And then you had '99 to 2006 where performance was terrible because of the dot com bust.

So venture is much more variable by vintage year than buyout's been, buyout's been very consistent.

It's still over time beaten the S and P 500, but a lot more variation.

And then the other thing that's a question mark with venture at least among the academics is that the beta of venture funds is a good deal greater than one.

So you have to decide if you're an investor, do you care?

Like some people will say if you think that the beta is a lot bigger than one and then you compare that return to venture, then the PME adjusted for the beta actually doesn't look so good.

On the other hand, if you're just if you say, okay, I'm just comparing it to the S and P 500, that's my benchmark, then it looks good.

So I think that's a venture is a trickier asset class in that regard than buyout.

I would add, funny enough, venture I think does give you some diversification benefit because it performs well at different periods.

Like I just said venture didn't perform very well 2020 to 2025, the S and P went up.

And so venture does perform differently from the S and P 500.

And that's the entire venture asset class.

So that is the mean return for venture.

That's mean.

And so you also have to be careful on venture in that mean is not median.

And so their median is lower.

So there's a skew and buyout the mean and median are pretty close.

So in buyout, it's sort of the outliers, it's more of a normal distribution, let's say venture there, this is the getting into the top funds matters and the top funds are more predictable in venture.

Buyout it's very hard to predict who's going to be the top fund in any vintage year.

Venture it's you know the founders funds, the sequoias, the benchmarks have been consistent.

And so venture you have to make sure you're getting access.

Now that's the bad news.

The good news is the Adapar data, the returns are similar which suggests that people do get into some of the good funds.

There's like a 52% persistence in venture.

I believe that's a University of Chicago study actually.

Well, it would have been my study.

To quote you back to yourself, 52% of funds raised post 2000 had above median performance, some some persistence, 32% at top quartile performance.

So 32%, persistence, fifth 52% outperformance post 2000 well, Steve, there's a lot more to unpack, but we'll have to leave it to another podcast.

I appreciate you jumping on and sharing your wisdom.

Great.

It was a pleasure.

Thank you.

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