Private capital has raised more money than it has returned | Hacker News Reader

Private capital has raised more money than it has returned

ft.com

29 pointsyarapavan21 comments

>And this isn’t just about the recent glut of capital raised, lagged returns and private equity exit blockages either.

Lagged returns is exactly the explanation here. They publish the table of investments and returns by year. Obviously you don't get your money back the same year you invest it. It's more often a ~7 year investment. But let's round down to 5 years.

Look at the chart and compare the investment in PE to the return 5 years later. It's a gain of 80-100% in that time.

This is simply how the math works when the investments into a strategy are growing exponentially, with a delayed return. It can continue indefinitely to produce 100% returns for investors, while a snapshot at any given time will make it look like the strategy has lost money overall.

Additionally, the size of PE cannot only be measured in the inflows and outflows. It has to take into consideration the value of the businesses being held, which it seems this article completely ignores.

My opinion is that private equity is the biggest scam of them all.

It’s essentially just money poured in unregulated markets, fueling unaudited businesses very often highly in debt and running on very shaky grounds, in such way that they could have never been listed publicly. The whole private equity sector is kept alive only by more money poured into system and more debt, in the end looking very similar to a pyramid scheme.

I see people say this and just have to ask what you think you know that the investors in PE funds don’t? Asset management is an insanely competitive industry. There are loads of alternatives products available. Why would people continue to invest in a scam? Do you think there is a chance you don’t understand the industry as well as the asset allocators who study it full time?

I'm guessing GP meant scam as in "a terribly short-sighted way to structure an economy" rather than your garden variety bait-and-switch scam.

Easy. The entire market is full of scammers. They compete on how to scam you the best. And the companies that don't scam don't survive. Tada! There's nothing else to invest in but scams.

It's kind of how even though Google is dying due to returning awful results, no other search engine eclipses it, because the results they return are just as awful.... Yes, even kagi. Because pretty much the entire internet has become awfulized.

Let me make an analogy with the pro asset managers. I surf the internet full time. But that doesn't give me freedom from an enshittified web. That just ensures that I can still make my living off of it, as a software developer who needs the web for references and problem solving.

Managers realize it's a shell game, because they're the dealers and they're playing it for revenue against the marks. They just have to be a little more careful than the final victims.

> whole private equity sector is kept alive only by more money poured into system and more debt

Source?

This is silly question. Very few people believed that Enron was insolvent or that MBS presented systemic risk even if the rating agencies weren’t completely corrupted.

https://archive.is/YVSrY

They don't define their terms.

> Hedge Fund

> A hedge fund is a limited partnership of private investors whose money is pooled and managed by professional fund managers. [1]

> Private capital / equity

> Private equity describes investment partnerships that buy and manage companies before selling them.

> Private equity is often grouped with venture capital and hedge funds as an alternative investment.

Then, interestingly, they've been more fashionable lately:

> The private equity industry has grown rapidly amid increased allocations to alternative investments and following private equity funds' relatively strong returns since 2000.

Which might explain why working at public companies has been so crappy for the past several years.

But the best bit comes from this article [3]:

> One hedge fund manager currently trying to raise capital said investors often cited the lack of distributions they had received from their private equity investments as a reason why they would not invest.

They won't invest in a safer bet, because they got burned by a bad one. Amazing. No wonder it's so easy to make money investing for people/orgs with money if this the behaviour you can expect from them. Is it really as simple as: "Hey I heard this was a good investment, give me money."? If that's an example of the simple-minded thought process that investors go through, it must be so simple to earn money this way.

[1] https://www.investopedia.com/terms/h/hedgefund.asp

[2] https://www.investopedia.com/terms/p/privateequity.asp

[3] https://www.ft.com/content/62b1db7b-3e78-47ca-865e-02cc40491...

It's not that potential investors (in funds) have been burned so much as that the lack of distributions means they either don't have the liquidity to spare or they are up against limits as to what percentage of investments they want to hold in alternatives/illiquid investments.

Not coincidentally, the managers can charge fees only on the capital they're managing, i.e., the capital they haven't returned.

The point of investments is that they grow. If the managers grew the money well, they'd still have plenty of capital under management after returning some back to the investors.

Serious question: why would I do that?

I mean, sure, at some point. But there's no regulation/oversight telling me I have to give you any back. In fact, my T&Cs probably say specifically I don't. If I give you 1%, that's 1% less that I have to play with. And it seems that in this market, if you don't like it, there's a line of folks behind you willing to write a check. Private capital is where you park your phuck-you money, so everyone involved seems reasonably ok with the status quo.

> In fact, my T&Cs probably say specifically I don't.

What basis of experience do you have to say “probably”? Where do people get this overconfidence. This is absolutely not true and is well defined in most subscriptions, especially post 2008.

What basis

The ones I've read.

Where do people get this overconfidence.

Probably the same place you got it.

If you had read them, you wouldn’t call them “T&Cs” because there are specific names for these documents like PPM which are standard nomenclature.

But ok.

Oh, man...that's got to be the most classic Comic Book Guy dismissal I've seen in a while. "You said Khan was stranded on Ceti Alpha 4, when OBVIOUSLY they were stranded on Ceti Alpha 5. Everything you say is invalid!".

Bet you're a real joy at parties.

I mean, that was just the giveaway...your entire premise was wrong too.

Wouldn't this almost always be the case? To me it's like saying "some stock holdings are not in profit." This is always the case of course unless the stock market across the board is at all time highs.

When I invest, and especially if I roll returns into investment, this means as a rule more money is invested than has been returned.

This is silly. It’s complaining that investments made in the last 3 years haven’t returned. None of these investors in recent AI companies including investments in high return investments like Canva or Anthropic expect to have a distribution right now. They invested with a 7+ year horizon.

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