I am not surprised that mediocre performers will enter any market and drag down the average. In order to tell if it is "skill", you have to see consistency.
To put it another way: Is it more likely than average that Sequoia's next fund will beat the S&P?
I don't doubt any of this a bit.
Let me tell you a story that may or may not be true. We would need a study to tell us.
There are some very smart people who have noticed that debt is much cheaper than equity. They go into a company and borrow against the cash flows of the company. They borrow enough to buy the company and have cash leftover. Essentially they find money for free. In order to do this, they have to know the bankers who trust them, know how to value the firm and so forth. They go out and make a killing year after year.
You and I look at this and think, how hard can it be? We put up a shingle, and we try to do the same thing. Now we don't have the same relationships so we put everything on our credit card. We can't value the company properly and make a few mistakes. We lose a lot of money for a few years and shut down.
Let's say that when you average your and my performance with the other company, we get the S&P 500 average. And we conclude there is nothing in private equity and that there is no skill involved.
Is that the right way to look at it? Or should say that there is PE as "properly" practiced?
I suggest a simple test: if that other firm makes money year after year then there is skill. If their company is up one year and down the other, and you and I have a good year and then a bad year, it may be luck.
It's a matter of perception. PE is generally viewed as advantageous because they have less strings attached, and do more, have the best teams in the business, huge political access (massive political figures on funds boards).
They do post higher returns. Most people think they do, and they charge higher fees.
But if you risk adjust those returns, they're not doing anything. Literally nothing if they can't beat the S&P consistently.
Here's the problem: the 2+20. If PE managers are getting 2% for managing and 20% of the upside, then, well, you might as well just stick your money in the S&P and save all that.
Given those higher management fees, PE is actually a money loser. Just hustlers.
It might very well be something else altogether once you look at the industry, it could be some funds are just crap, some are consistently great - and it boils down to the ability of fund sales people to make deals. So if there are a lot of crap funds with good sales staff ... this will drag the average down. Maybe the good PE firms are actually good :)
They get a special tax break on top of it!