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Drawing on allocator debates and cited research, it questions whether the historical private equity return premium is supported by unbiased data, explores how leverage, size, value factors, and benchmark selection may explain apparent outperformance, and highlights how liquidity, fee structures, and portfolio composition affect realized results.",{"@graph":14,"@context":72},[15,34,55],{"@type":16,"itemListElement":17},"BreadcrumbList",[18,23,27,31],{"item":19,"name":20,"@type":21,"position":22},"https://docshare.wps.com","Home","ListItem",1,{"item":24,"name":25,"@type":21,"position":26},"https://docshare.wps.com/document/","Document",2,{"item":28,"name":29,"@type":21,"position":30},"https://docshare.wps.com/document/research-report/","Research & 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\nIn March, the CIO of the $152 billion University of California investment fund said,“…we will primarily be all out (of hedge funds)…we’ll replace that with private credit – which has been a better place to be.”1 This headline, alongside an ‘eye roll’ emoji, joined numerous others posted in our investment team group chat – all various twists on the (in)famous quote from the then-CIO of Calpers, Ben Meng, who in 2019 said,“We need private equity, we need more of it, and we need it now.”2  \nIt is no secret the allocator community loves private markets. Flows data consistently reveals a growing appetite for private assets over public ones or ‘tradeable strategies’ such as hedge funds. For example, McKinsey reports that total private market AUM has grown at an annual rate of nearly 20% since 2017, while Goldman Sachs calculate just a 4% annualized growth rate for hedge funds since 2015.3 Dry powder in private markets has continued its decade-long growth streak and rose to a new record $3.7 trillion in 2022.4 63% of institutional investors anticipate making private equity their largest allocation over the next two to three years.5  \nWhen the great David Swenson popularized the ‘Yale model’ during his tenure as the Yale endowment’s CIO in the 80s, he recommended increased exposure to a spectrum of alternative asset classes and strategies, not just private markets. Since then, the performance of hedge funds has largely disappointed while the performance of private assets (although harder to measure and typically less transparent) has exceeded expectations. Alongside quotes from Swensen himself calling private equity ‘a superior form of capitalism’6, private markets investing has become synonymous with patient, wise, long-term capital, while hedge fund and public equity investments are conflated with short-termism and price movements rather than true ‘value creation’ (more on this later) .  \nAs one might expect, our paper will argue that investor preferences for private markets, while initially somewhat valid, have reached a tipping point that will have consequences for future returns. None of the arguments we present are novel, but when summed together we think they make a strong case. We question:  \n▪ Whether the unthinking acceptance that private asset returns beat public market equivalents is supported by unbiased data;  \n▪ Why private markets are considered less risky than public market equivalents;  \n▪ To what extent privates were advantaged by low rates (and could be disadvantaged by higher rates, despite marketing narratives to the contrary);  \n▪ The influence of incentive structures and career risk on allocators of capital;  \n▪ And how forward returns for private markets could differ from past returns based on compositional changes in modern private portfolios.  \n1 [https://www.bloomberg.com/news/articles/2023-03-16/uc-endowment-plans-to-jettison-hedge-funds-cio-bacher-says](https://www.bloomberg.com/news/articles/2023-03-16/uc-endowment-plans-to-jettison-hedge-funds-cio-bacher-says)  \n2 [https://www.wsj.com/articles/calpers-wants-to-double-down-on-private-equity-11552834800](https://www.wsj.com/articles/calpers-wants-to-double-down-on-private-equity-11552834800)  \n3 McKinsey Private Markets Annual Review 2023  \n4 [https://www.bain.com/insights/topics/global-private-equity-report/](https://www.bain.com/insights/topics/global-private-equity-report/)  \n5 [https://www.ipe.com/news/private-market-allocations-growing-says-state-street-research/10064925.article](https://www.ipe.com/news/private-market-allocations-growing-says-state-street-research/10064925.article)  \n6 [https://www.cfr.org/event/conversation-david-swensen](https://www.cfr.org/event/conversation-david-swensen)  \nThe Historical Return Premium for Private Equity  \nThe most obvious explanation for why investing in private markets is so popular is the","cbCaieJ1OJUrO9Tb","https://ap.wps.com/l/cbCaieJ1OJUrO9Tb","pdf",389997,"English","# Investor Preferences and the Tipping Point\n## Private Markets vs Public Benchmarks\n## Historical Return Premium for Private Equity","[{\"question\":\"Why do many allocators prefer private markets according to the document?\",\"answer\":\"The document states that private markets are popular because they are believed to generate better performance than public markets, supported by commonly cited return-premium narratives and expectations of value creation.\"},{\"question\":\"What does the document say about evidence for the historical return premium in private equity?\",\"answer\":\"It presents caveats suggesting that the apparent premium may not hold under unbiased comparisons, with research indicating that factors like leverage, size, and value can explain performance rather than investment alpha.\"},{\"question\":\"Which benchmark and portfolio-design issues are raised as affecting private equity return comparisons?\",\"answer\":\"The document notes that choosing public market benchmarks, such as broader indices versus small-cap comparisons, can change conclusions, and that private portfolios’ geographic and sector weighting can make global comparisons misleading.\"}]","Taking the Road Less Traveled - Avoiding Disappointing Expected Returns | PDF",1787965762,18]