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

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My guess is your definition of alpha is performance above S&P annualized returns. That’s not really alpha.

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I don’t think PE overall actually generates alpha (of course some will), but how that is the definition of alpha: excess returns above a benchmark. What would you call alpha?

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Why sacrifice liquidity and less risk for what amounts to be similar to inferior returns?

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Agreed here. I’ve gone down the rabbit hole, and it looks worse and worse as I learn more about it. My newest discovery is that PE forms will take out subscription lines of credit, not to maximize real returns, but instead to delay deploying capital so they can show a higher IRR (6.1% on average), but with lower real returns because of interest financing.

This is the most absurd thing I’ve seen. They take on more risk with leverage, to get worse returns for their investors, solely to give a distortedly higher IRR, to make it seem like a better investment.

I’m usually anti-regulation, but I think there at least needs to be some regulations that require more transparency. This just flat out dishonest nonsense that misleads investors. I’m ok if they do it, but I think they should be required to let investors know what they are doing and how this distorts their IRRs. I bet they would suddenly change their mind.

And note, not all firms do this though but inflation-adjusted debt financing for PE firms, went from $86 million in 2014 to $5 billion in 2018, a huge increase, so obviously it’s pretty pervasive. And obviously there are plenty of other valid reasons to take on leverage, but this is not one of them.

So it’s no wonder PE has gotten so big, when they can mislead investors and rip them off. And a lot of them probably don’t have any idea (studies show this), but they see that really high IRR and probably think “that was a good investment,” failing to realize that the real returns are mediocre and those funds are locked in and illiquid for upwards of a decade.