[lbo-talk] New study: Private equity sucks (for investors)

[Joseph Catron]

FOR MOST PEOPLE, stocks are those numbers they always hear about on
the news, but there is another world of stocks - known as private
equity - that is off-limits to the general public. Private equity
funds invest for the elite - pension funds, university endowments, the
super wealthy. But the managers of these funds are not obligated to
disclose their investments, so there has always been some mystery
surrounding how well they perform. A new study finds that private
equity funds actually do worse than the S&P 500, a benchmark index of
stocks available to the general public. An important reason for this
underperformance is the fact that fund managers can end up skimming
off more than 25 percent of the fund as a fee for their services. The
study does find that some funds do consistently better than the
average, but it's not clear why most funds underperform. The authors
speculate that there may be enough mystery surrounding fund
performance to keep new money rolling in, or that perhaps university
endowments and pension funds have other interests that temper their
focus on maximizing financial return.

Phalippou, L. and Gottschalg, O., "The Performance of Private Equity
Funds," Review of Financial Studies (forthcoming).

http://www.boston.com/bostonglobe/ideas/articles/2008/05/04/surprising_insights_from_the_social_sciences/?page=2

-- 
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