Are the smartest folks in the room changing their minds?
For years, Private Equity has been the holy grail of investing. With superior accountability, accountancy, business planning, and investor access, investors (who could afford it) loved what private equity could do for their portfolios. The appeal is clear: if a company’s CEO behaves badly in the morning, he’s out by the afternoon. If you question the company’s accounting, you can bring in your own accountants. A company can be run for cash or market share or long-term growth, depending on the circumstances. What’s not to like?
But some sovereign wealth funds and university endowments are starting to scale back their allocation to Private Equity. Yale has reduced its commitment from 35% to 31%. Harvard Management’s CEO sent a nasty-gram complaining of underperformance to several fund-providers. And a few prominent sovereign wealth funds have hired personnel with PE backgrounds to keep a closer eye on these investments.
Private Equity investing demands a multi-year commitment and can require cash-injections on short notice. If investors can’t fulfill their cash-calls, the consequences could be disastrous. It’s not for everybody, and it’s not a free lunch. But for those who can manage it, private equity offers a way to get around some of public equity’s challenges.
Douglas R. Tengdin, CFA
Chief Investment Officer