Posted 6 months ago on April 7, 2014, 1:30 p.m. EST by schmoot
from Kerrville, TX
This content is user submitted and not an official statement
Private Equity's Lake Wobegon Fallacy: All Investors Are Above Average Posted on April 7, 2014 by Yves Smith
Reader Greg Hill sent us a letter he wrote to the Seattle Mayor and City Council questioning its decision to triple its commitment to private equity when they've not only consistently underperformed their benchmark for that strategy, but even done less well than if they had simply invested in US equity.
That letter led us to look at a request for proposal (RFP) that the City of Seattle Retirement System issued just a few weeks ago, where it is seeking an advisor to manage its private equity program. We've embedded it at the end of this post.
On page 7, The RFP sets forth a requirement for the to-be-hired private equity advisor to achieve:
The investment objective is to achieve consistent top-quartile private equity returns while providing diversification to other asset classes. Additionally, the program manager is expected to achieve, over the course of a manager's term, the following:
An annualized dollar-weighted internal rate of return (net of fees and expenses) in excess of 3% above the Russell 3000 Index return.
An annualized dollar-weighted internal rate of return and return on invested capital multiple (net of fees and expenses) in excess of top-quartile benchmark represented by Thompson Venture Economics, on a comparable vintage year basis.
This statement is revealing, and not in a good way. Mind you, it's not because the City of Seattle is unusual for expecting that it can consistently out-invest more than 75 percent of private equity limited partnership investors. It's the opposite. Seattle's investment objective is revealing because it's the stated goal of almost all LP investors in private equity, who almost universally believe the mathematical impossibility that all of them can assemble a portfolio of PE funds that will beat the performance of three quarters of their peers.
note: Only in the delusional world of Rand, Reagan and Friedman/Mises do zero sum conditions not rule all games. - schmoot