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Comment by s1artibartfast | Hacker News Reader

Regarding 2, the still requires you to believe that either Banks or Pension funds are fine with hemorrhaging millions or billions of dollars buying PE debt and haven't figured it out over the course of a half century.

I think the real answer is more unsettling for some. PE debt has volatility but is on net a profitable investment. You can smooth out volatility with volume and by spreading it around.

This is the only explanation that doesn't depend on a source of dumb money that can never learn buying this debt.

I'd be willing to change my opinion I came across data showing that PE debt has net losses over a multi-decade time scale.

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> still requires you to believe that either Banks or Pension funds are fine with hemorrhaging millions or billions of dollars buying PE debt

The managers of those funds make money based on deals and they move on before the deal goes south. Principal agent problem.

EDIT: lordnacho explains better: https://news.ycombinator.com/item?id=36751012

That's certainly a possibility, but I wouldn't put it at the top of the list without ruling out the possibility that they actually make money.

Where does the claim that PE debt is a loser come from?

According to one of the top links on google, state pension returns from PE investments is almost twice that of their stock investments if you look at 2000-2021 (11%/yr vs 6.9%/yr)

https://caia.org/blog/2022/07/20/long-term-private-equity-pe...

Those returns are completely different. Private equity assets cannot be easily sold. Try realizing that 11% return and you will quickly see it does it not exist. You need to take a substantial haircut to sell.

I've honestly don't understand what you're saying. What are those returns different from?

We're talking about private Equity debt so I would think the 11% would be cash Returns on loans per year.

If you make 11% per year return on your lending portfolio over multiple decades, how is that not comparable to your stock market gains?

Sure, resell of loans might be harder, but they're paying cash interest.

> This is the only explanation that doesn't depend on a source of dumb money that can never learn buying this debt.

No it isn't. A simpler explanation is that the people making the decision aren't the ones paying for the failure. I see this all the time at the executive level in finance -- people will knowingly make bad deals if it gets them their bonus.

but how are they getting a bonus if the deal is bad? Esp. if it has gone on for a while?

Someone still has to be losing money on that deal or it's not a bad deal. Someone is paying the bonus and giving the executive money to invest

You're also starting from the assumption that the deals are bad. Why is that?

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