Monday, August 28, 2017

Throwing shade has evolved from millennial slang to a cosmic event as millions trooped from their homes and workplaces last week to watch the eclipse throw shade across America. Throwing shade at private equity has emerged as a stress relief activity for certain investors who simultaneously fail to recognize it as their best performing asset allocation class. Oddly, the financial press chooses to report certain large investors’ proclamations as being of note rather than mere utterances from the Path of Banality. Let’s create a generic large investor for this discussion: Pension Asset Manager Public Employees Retirement System (PAMPERS). PAMPERS continues to rail against private equity fees, but when asked, does not actually know what they pay in private equity fees. It would seem more balanced if, before publishing, the financial press would footnote quotes from large investors like PAMPERS with the following: “As an investor PAMPERS is more focused on net fees than net returns.” Otherwise, you are simply quoting Goliath on great strategies for defeating short boys. No one could reasonably suggest private equity fees are inexpensive, but absent the context of results, the criticism is hollow. PAMPERS is now considering establishing or acquiring its own private equity firm as a strategy for reducing private equity expenses. Such an effort will no doubt succeed in lowering both costs and returns as the possibility of attracting first rate talent to a politically charged investment program are low. Best of breed managers are unlikely to want PAMPERS and its baggage as an investor leading to adverse selection of managers and worse results for its pensioners. When did fiduciary duty get redefined to be a weapon of math destruction as non-investment objectives dominate?

2017 has become a clown car for private equity offerings as another emerges as soon as you think the final one has been seen. The flood of private equity offerings, much like the appearance of the tall ships in NY Harbor, spawns the appearance of many other craft. In the case of private equity, those other vessels are a wide variety of service providers and new investors who become the PE camp followers. At the top of the food chain are agents, both legitimate agents and shady agents who find their calling when there is a whiff of easy money in the air. Next are the conference organizers who fill ballrooms with free speakers and mint money off attendees eating rubber chicken while swapping business cards. Following in the parade are the compliance consultants who offer fear insurance against the spectral presence of a regulator that was invoked to cure a private equity problem no one could identify in Dodd Frank. Software providers for all occasions then appear offering to sell you solutions for reporting, portfolio monitoring, fee allocation, diversity management and global warming. Finally, “this asset class seems cool” crowd appears trying to score a spot in the hot funds. This group includes the Powerball Lottery winners, fund of funds of funds founders, relatives or high school friends of recent NBA lottery picks, the latest Silicon Valley IPO executive and Afghan warlords. The task for the private equity fund manager is to winnow the wheat from the chaff among both the providers and the investors.

I’m Rob Morris and I approved this blog.

Throwing Shade