Side Letter: Bears in a China shop, Phalippou’s exit, Howard Marks on risk

Ludovic Phalippou has ploughed a pretty lonely furrow in the world of PE-related academia. Do you love him or loathe him? Here's today's brief, for our valued subscribers only. 

He said it

“The potential for further gains from things turning out better than expected or valuations continuing to expand doesn’t fully compensate for the risk of decline from events disappointing or multiples contracting”

In his latest memo, Oaktree Capital co-founder and co-chairman Howard Marks points out that, as the S&P 500 is down only 8 percent from an all-time high hit in untroubled times, “the odds aren’t in investors’ favor”.

Just happened

Phalippou’s last dance

After more than a decade scrutinising private equity performance and fees, Ludovic Phalippou (pictured above) is throwing in the towel. The Oxford University Saïd Business School professor – often PE’s loudest critic – has decided he has no more to say on the topic.

“I spent 15 years trying to show the misleading information that I saw, trying to do the data and doing the maths as best I could to document things,” Phalippou said on a webinar earlier this month. “But there is this important law of physics… It is that the amount of energy required to combat a unit of BS increases exponentially with the amount of energy used to generate that unit of BS. If you have 100,000 people out there that want to generate BS, it’s gonna be really, really tiring.”

Phalippou’s final paper on fees and performance argues that private equity has returned around the same as public equities since at least 2006 and that PE’s compensation model has resulted in a historic transfer of wealth from pension fund members to industry execs.

“I cannot say I am sad Ludovic Phalippou has decided to focus on other things,” wrote one respondent to our Friday Letter on the topic, who noted that complaints about high fees are unwarranted as long as net returns continue to satisfy investors. “He does not need to keep counting other people’s money.”

In a podcast with us last year, Phalippou admitted it’s not always easy being the guy who everybody tries to avoid at conferences. His stance has led to missing out on lucrative consulting gigs and speaker events over the years.

Are we sad to see Phalippou move on? Yes. His work has encouraged both investors and journalists to keep asking questions about the fundamentals of investing in PE: fees and performance. However, we won’t miss the way it is often covered by peers elsewhere in the financial media (for more see below).

Bears in a China shop

China might be further along in its coronavirus recovery, but that hasn’t stopped private equity heavyweights being wary. Carlyle Group, for example, did not make any new Chinese investments in the first five months of 2020, Yang Xiangdong, chairman of Carlyle Asia, told Bloomberg, noting there was nothing to be gained from trying to be the “hero” who calls the bottom of the ongoing churn.

The China head of another firm in the PEI 300’s top 10 tells us they are cautious about embarking on new investments because of uncertainty around pricing, but that they are confident of completing two add-on acquisitions before the year is out. China deal value fell to $5 billion in Q1 from $12 billion in the same period last year.

What you’re reading

Here are the PEI stories you spent most time with last week:


Women of secondaries!

If you read sister title Secondaries Investor’s weekly letter, you’ll know it is currently receiving submissions for its always keenly anticipated Young Guns ranking (previous instalment here) which will again run in PEI’s Secondaries report in September. This year’s research task has got off to a deflating start; less than 4 percent of the submissions this year have been for women. The submission window will remain open for an extra week for female candidates only. Get yours in to

  • In response to the letter, some readers noted that the phrase “Young Guns” has male connotations. So we are rethinking it. Any suggestions for a new name welcomed:

Press offensive

Can there be any investors in PE out there who, after years of industry debate and two iterations of ILPA guidelines on the topic, do not understand the pros and cons of their GPs using subscription credit lines? The Financial Times seems to think so, if this article is anything to go by. To give the FT the benefit of the doubt, perhaps this colourful warning, which talks of “financial wizardry”, “magic” and “spellbound investors bewitched by claims of superior returns”, is not aimed at sophisticated investors.

Dig deeper

LP meetings. It’s Monday, so here are some LP meetings to watch out for this week.

22 June

23 June

24 June

26 June

Today’s letter was prepared by Toby Mitchenall with Isobel Markham, Adam Le, Rod James, Carmela Mendoza and Alex Lynn.

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