NYT DealBook blog, Monday, July 26, 2010:
Just what’s going on with private equity? Activity in the industry is on the rise, so a fresh report on the industry is timely.
Enter Peter Morris’s “Private Equity, Public Loss?”, a report written for the Center for the Study of Financial Innovation, which highlights the basic misapprehensions that Mr. Morris believes many hold of the industry.
In the report, Mr. Morris says many investors are mislead to believe “interests are aligned,” a belief belied by a reality that is more complex.
The report’s chief points are these:
Realised returns are lower than advertised, even for top-quartile managers.
The quality is also lower: excluding high debt levels and general stock market performance, managerial skill accounts for only a fraction of the total return.
This calls into question fee structures, which may remove all the gains attributable toskill.
Conflicts of interest between investors and managers remain real and substantial.
Investors’ apparent failure to question the level and make-up of returns, and fees, raises questions about their collective status as “sophisticated investors”.
Perverse incentives in private equity may distort wider markets.
At the very least, private equity firms’ results should be measured more rigorouslyand made more transparent.
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