Blackstone just got added to the S&P 500 index, and this coming Tuesday is International Talk Like a Pirate Day. That makes now a good time to mention two scathing private-equity books that came out a week apart this year, with so much pirate imagery in the titles alone that Johnny Depp might be owed royalties.
Private-equity firms are go-betweens that raise money from sophisticated investors for funds that buy companies in whole or part. Clients typically commit capital for 10 years that’s used to do deals, cultivate assets, and get out. Fees generally range from obnoxious to appalling—say, 1.5% to 2% of assets a year plus 20% of profits over a minimum rate. Increasingly, private-equity firms also run funds for loans, called private credit, and real estate.
Of course, stocks look pricey, too. Which does better? Consider the views of two scholars who debated in 2020. Ludovic Phalippou at the University of Oxford says that private-equity fund buyers believe in “Alpha Claus”—alpha meaning risk-adjusted outperformance. He calculates that U.S.-focused funds with vintage years from 2006 to 2015 turned each dollar invested into $1.60, similar to index funds.
Let me settle this: I have no idea who’s right. Investing isn’t physics, where laws can perfectly predict future motion. Stocks have been around for four centuries. Imagine the uncertainty for a four-decade-old asset class with limited pricing.