Thread by @oren_cass

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…