I was an institutional lender both in New York and at the World Bank in Washington, DC. I've done private equity in the emerging markets for a very large private equity fund as well as for the World Bank's private equity operation. As he pointed out, I'm an author.
I'll describe private equity for a minute. So the way a private equity fund works is, you have a number of large institutional investors-- 10 or 15, sometimes 20-- putting in tens of millions, sometimes hundreds of millions of dollars into a fund.
So you will have more losses compared to the public market if you've got a lot of leverage. So the private equity fund , in theory, should have more volatility. It should go up and down more than the stock market because of the greater debt.
So yeah, I think the evolution from treating Toys R Us as the widget, and maybe we bankrupt Toys R Us and that's fine, If you have a $500 million private equity fund , right, you take a 2% management fee, right?
So the fees are 60 times as great. So the manager of the private equity fund has got to beat the S&P by 3% every year just to compensate the investors for the fee.
we have these mega corporations and we have these mega funds. So, here in the UK, all the houses are being bought up by BlackRock, a massive private equity fund that wants the entire population to be a rental class forever. And you know, our Prime Minister has walked down Downing Street hand-in-hand with the CEO of this big fund saying,
Yeah, yeah. One of the issues that I feel, and this is what I'm concerned about, Mhm. to my friend's pub is that a big American private equity fund wants to buy the pub uh and turn it into a block
You buy 5 or 10 Venture Capital investments. There, usually the private equity fund or the VC fund is not controlling the company. They don't own a majority interest.
And that's because you can't sell these funds. You can't sell your part of a private equity fund like you can sell stocks. And you're also not getting instant feedback on what the price of your private equity portfolio is, because there's some uncertainty about what
And as a result, with the high fee drag, you're not investing the investor's money 100%. Perhaps, the private equity fund 's only investing 80% of investor's money. So there's a lot of hurdles that the PE fund has got to conquer to try to beat the stock market.
This was in grad school. I was going to go work at a private equity fund . It was a job while I was in grad school.
We'll talk a little bit as indicated about private equity returns and the associated fees. And then we'll close with, how do big institutions select a private equity fund ? And then I'll take some questions.
So it contradicts the theory. A lot of PE investors are saying, not only do I want to have the S&P return from my Private Equity fund , I want to beat it. And that's because you can't sell these funds.