Oren Cass Profile picture
Jul 22, 2021 14 tweets 7 min read Read on X
1/ You may not care about private equity (PE), but PE cares about you.

Its top source of capital? Public pensions. If you're a taxpayer, you're on the hook.

The unprecedented risk PE is piling on to firms makes our nation's economy less resilient. 🧵americancompass.org/a-guide-to-pri…
2/ The latest @AmerCompass Atlas takes a spin through the data on what private equity is up to. It's very good at offering the highest salaries and attracting the top business talent (who could otherwise be doing something more productive). americancompass.org/a-guide-to-pri…
3/ Private equity is not so good, unfortunately, at investing. 20 years ago, when it could acquire small companies at big discounts, it made money buying low and selling high. But once the discounts vanished, so did the returns. Big PE firms now make most of their money in fees.
4/ Here are the findings from some recent academic studies of private equity's performance:
❌ "no significant outperformance"
❌ "about the same as public equity indices"
❌ "essentially matched returns"
❌ "no edge over public equity"
❌ "negative alpha across the board"
5/ One of the best papers on private equity comes from @CliffordAsness's AQR Capital Management, which is funny because AQR hasn't been good at delivering results for its own investors. But it's good at pointing out the failings of others. Key chart: aqr.com/Insights/Resea…
6/ Perhaps most damningly, private equity returns look random. A firm with a successful fund ("top quartile," meaning it is in the top 25% of performers) is actually least likely to have its next fund also in the top quartile, according to @MorganStanley. morganstanley.com/im/publication…
7/ Your best chance of investing in a good private equity fund may be to find a firm whose last fund performed poorly. But mostly it seems to be just guessing. Of course, you'll pay the fees regardless. This is called Coin-Flip Capitalism. americancompass.org/essays/coin-fl…
8/ "So what? Who cares?" I hear you say. Well, poorly-managed and sometimes corrupt public pension funds continue to pile money into private equity, which is bad for you as a taxpayer. And the accumulating "dry powder" (uninvested cash) is forcing ever riskier investments.
9/ Remember, most of the private equity firm's profit doesn't come from making good investments, it comes from making any investment. The management fee, then the transaction fee, then the monitoring and consulting fees... The only way to fail is to give the money back.
10/ As @BainandCompany shows, private equity firms are thus paying unprecedented prices for companies, and trying to make up for it by loading them with unprecedented debt. This won't end well for anyone. bain.com/insights/topic…
11/ How's this for a warning sign: Private equity funds sell most of their companies to... other private equity funds. Increasingly, firms are raising money in new funds to buy companies from their old funds. institutionalinvestor.com/article/b1r14l…
12/ Companies acquired by private equity have been ten times more likely to go bankrupt. Expect that to get worse. And bankrupt or not, higher debt levels leave firms less able to weather storms, more likely to cut jobs in downturns, etc.
13/ Now seems a good time to mention, "not all private equity." Some PE firms create value and build great businesses. Obviously, private capital investment is important.

That's why the policy response has to be to set market rules, not condemn the market or shut it down.
14/14 Confronting Coin-Flip Capitalism provides a comprehensive rundown of the ways that our dysfunctional financial system is misallocating capital, talent, and risk; the reasons this demands a policy response; and options for pro-market policymakers. americancompass.org/essays/confron…

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More from @oren_cass

Jun 15
1/10 I say this out of respect, not disrespect, for Sohrab, whose analysis is always careful and thoughtful: This makes no sense at all. If the best effort at constructing a case from within an assumption of U.S. hegemony leaves logical holes this gaping, that era is truly over.
2/ First, Israel is conducting a campaign against a country that has orchestrated unending terrorism against it for decades and called for its destruction. It is not America's place to grant permission for such a campaign, to take responsibility for it, or to stand in its way.
3/ Not having responsibility for the campaign, the U.S. likewise does not have responsibility for the smoldering ruins that Israel may leave behind, no matter how much people rend their garments and complain. Yes, this requires a mindset change. So make it.
Read 10 tweets
May 27
1/ In an especially fun bout of market fundamentalism yesterday, @MattHennessey @WSJopinion argued that markets "are governed by the laws of economics the way the physical world is governed by the laws of gravity." I love this for two reasons...
wsj.com/opinion/jd-van…
2/ First, because it's disastrously inapt. Economics is nothing like physics. Its principles are not generated from repeatable experiments, nor do they hold consistently across space and time. Believing otherwise is a quite literal example of blind faith and fundamentalism.
3/ Second, though, it's perfect. Yes, the physical world is governed by the laws of gravity. But it is not governed only by the laws of gravity. Indeed, anyone who thought he could reliably predict the motion of bodies with knowledge only of gravity would be quite disappointed.
Read 5 tweets
Apr 14
1/ Today's Understanding America, You're So Vain, You Probably Think This Post Is About You, takes a look at the bizarre social media reaction to this @FrankLuntz tweet and what it says about the blinkered innumeracy and elitism of reindustrialization's skeptics.
2/ The Rorschach test here is one separating people who can think rationally and empathetically about the wide range of opportunities their fellow citizens might pursue, and those who lack that basic capacity. @scottlincicome apparently falls in bucket 2. Image
@scottlincicome 3/ See, if 25% of respondents say they’d prefer a factory job to their current job, that suggests an enormous opportunity for improvement in many lives. But @gtconway3d thinks only people who themselves see a factory job as their best option should support more factory jobs. Image
Read 6 tweets
Apr 6
Tough crowd, sore subject I guess. Deleting tweet and archiving it here. Only point I was trying to make is that I think comparative advantage mostly determines composition of trade, other factors drive level. I was curious how people would describe it. You didn't disappoint... Image
I particularly appreciated Alex's enthusiastic ALL CAPS confidence that comparative advantage explains the slave trade.
Thanks also to everyone who thinks richer countries always run deficits with poorer countries because the poorer countries can't afford to buy as much. I must have missed that chapter in Ricardo.
Read 7 tweets
Apr 3
1/ If you don't like what Trump did on reciprocity, that's fine. But if you're claiming it's indecipherable, you're not trying very hard.

In February, in Understanding America, I explained exactly how this might look and why:
2/ "Some analysts have taken the threat of 'reciprocal tariffs' to mean literally holding a mirror up to the tariff regimes of other countries... there’s no reason to believe that’s what the administration is pursuing." understandingamerica.co/p/the-one-word…
3/ "Trump’s orders indicate a desire to assess the extent of imbalance in market access between the U.S. and each of its trading partners, and then use a tariff to counteract it." Image
Read 6 tweets
Feb 3
1/ Some thoughts on how to understand the tariff kerfuffle, at the aptly named Understanding America.

To start with, you have to distinguish between four different uses for tariffs: 🧵 Image
2/ Uses of tariffs:

#1: Funding. Tariffs can generate revenue.

#2: Decoupling. Tariffs can shift supply chains.

#3: Rebalancing. Tariffs can promote domestic production.

#4: Negotiating. Tariffs can provide powerful leverage.
3/ Notice that the first three uses of tariffs are fundamentally economic in nature and the policymaker’s goal should be to impose them in a stable and predictable way that minimizes economic costs domestically and creates confidence that they will remain for the long-term.
Read 10 tweets

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