re: Private Equity investment. Anyone used PE to generate alpha?

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So why do you think they remain popular investments?

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I mean I think private equity could be a good investment in one's portfolio, specifically like CalPERS and other large pension funds, which have so much money that they can invest broadly across private equity funds (e.g., essentially functioning like a private equity index) while still only being a small portion of the portfolio (e.g., CalPERS has $43 billion in private equity but that is less than 9% of its allocation).

In addition, there are clearly some firms and funds that do really well. so there are clearly good opportunities. But I think the issue is that there is a lot of variability in the quality, and it's probably even larger than the returns indicate since the funds/firms that perform well tend to be more cautious about their calculations of returns, even understating them, whereas the poorer ones overstate their returns.

So my general hypothesis is that since private equity did perform well for decades, they rightfully became a popular investment; however, as its popularity grew, it allowed for lower quality firms to enter the space, which decreased the aggregate returns in the market.

In addition, with more competition and lower quality firms, I suspect that this then led to an expansion investments investments into companies that may had historically been in the public markets instead, leading to a higher correlation with the public market. I also think that these could be companies that may have been riskier and/or of lower quality, so it's an addition by subtraction for the public markets and brings down the performance of the private equity leading to further convergence of the two.

I also think that there is something to be said about "exclusivity," which probably draws people to it, especially as access to the public markets has gotten much easier (applications, free trading, etc.). So being able to invest in something exclusive carries some level of "prestige," regardless of performance.

Overall though, I think investing in private equity, especially if unlike say those large pension funds that can broadly invest, requires a lot of due diligence on the front end if one can only invest in a single or very few funds. And given the lack of transparency, I think this is probably difficult to do, which makes it not a good option for most people.