People sometimes worry that the decrease in companies going public (arguably due to greater securities regulations) will drive down the expected return for public investors as compared to private ones. But it seems like public investors can still get decent exposure to private markets through publicly traded private equity and BDCs.
Maybe an actionable takeaway is to overweight those companies in oneās portfolio, to account for the private returns you donāt have access to.
Really interesting. There are diversified private equity ETFs (also for BDCs). This has outperformed the market slightly (4.4% annualized return vs. 3.8% for their benchmark S&P index), but I guess because youāre then doing active investing as you move away from the global market portfolio and taking higher risk. Seems to violate the efficient market hypothesis that there should be a free lunch here. I guess the difference to buying other ETFs (like a tech ETF) is that is diversified across industries and in a way itās own asset class. In other words, depending on your level of risk aversion you can skew your portfolio towards bonds, stocks, and private equity, and now also with the advent of crypto ETFs, that connect the crypto āasset classā to the stock market, you can determine your level of risk, through skewing it more towards the latter categories.
Just came across this article that suggests that thereās some movement in this direction generally, with Vanguard offering private equity as an investment class.
I guess because youāre then doing active investing as you move away from the global market portfolio and taking higher risk.
Couldnāt you argue that youāre actually moving towards the ātrueā global market portfolio, which would include many non-publicly-traded assets? (Similar for real estate: seems plausible that people should overweight REITs in their portfolios.)
Seems to violate the efficient market hypothesis that there should be a free lunch here.
Couldnāt you argue that youāre actually moving towards the ātrueā global market portfolio, which would include many non-publicly-traded assets? (Similar for real estate: seems plausible that people should overweight REITs in their portfolios.)
Because the companies included in the private equity ETF are also already represented in the global market portfolio, the percentage of the market cap /ā total market cap is already includes what the market believes to be the discounted future profits of all non-publicly-traded assets that the private equity (e.g. Blackstone) invested in.
Not sure this is true if the risk is also higher.
Yes, beta (and risk) are higher and so alpha and the expected returns are higher, but thatās the trade-off so thereās no free lunch. Itās similar to foregoing bonds and only investing in stocks in oneās portfolio, but even riskier.
I think weāre talking past each other a bit. The claim isnāt that itās directly valuable to overweight publicly traded private equity companies in oneās portfolio. Rather, the claim is that:
The true global portfolio contains much more private equity than the publicly traded market. This estimates that PE is about 3.6% of the global portfolio.
So ideally oneās portfolio (if youāre trying to mimic the global market portfolio) would be about 3.6% PE.
But just buying an equities index fund will underwight PE as an asset class because most PE isnāt public.
You can simulate the true global market portfolio by overweighting public PE if you think public PE should perform similarly to PE broadly.
Oh I see- thanks for clarifying! This is a very interesting idea, but somehow it still seems counterintuitiveā¦ by the same logic, wouldnāt you also want to overexpose yourself to e.g. publicly traded real estate because most of it isnāt public?
If true, and if most passive (institutional) investors arenāt sufficiently exposed to PE (or real estate), wouldnāt that suggest that the market undervalues this asset class and you can beat the market by investing in it? Honest question, I havenāt thought this through very well, but something still feels counterintuitive that you could create a better passive global market portfolioā¦
if you think public PE should perform similarly to PE broadly.
I think this might be another big ifā¦ though also one should be surprised if thereād be a big discontinuous jump in returns when going from non-traded to traded.
by the same logic, wouldnāt you also want to overexpose yourself to e.g. publicly traded real estate because most of it isnāt public?
Yes, I think that is true as well!
If true, and if most passive (institutional) investors arenāt sufficiently exposed to PE (or real estate), wouldnāt that suggest that the market undervalues this asset class and you can beat the market by investing in it?
Honest question, I havenāt thought this through very well, but something still feels counterintuitive that you could create a better passive global market portfolio...
Hm, very possible I am thinking about this wrong, but itās pretty intuitive to me. After all, isnāt the ātrueā global market all investable assets, not just publicly traded assets? Itās the same reason why the Nasdaq Composite is a poor stand-in for the global stock market: for a variety of reasons, it only has a certain subset of publicly traded equities, and other baskets of equities have different risk-return profiles.
People sometimes worry that the decrease in companies going public (arguably due to greater securities regulations) will drive down the expected return for public investors as compared to private ones. But it seems like public investors can still get decent exposure to private markets through publicly traded private equity and BDCs.
Maybe an actionable takeaway is to overweight those companies in oneās portfolio, to account for the private returns you donāt have access to.
Really interesting. There are diversified private equity ETFs (also for BDCs). This has outperformed the market slightly (4.4% annualized return vs. 3.8% for their benchmark S&P index), but I guess because youāre then doing active investing as you move away from the global market portfolio and taking higher risk. Seems to violate the efficient market hypothesis that there should be a free lunch here. I guess the difference to buying other ETFs (like a tech ETF) is that is diversified across industries and in a way itās own asset class. In other words, depending on your level of risk aversion you can skew your portfolio towards bonds, stocks, and private equity, and now also with the advent of crypto ETFs, that connect the crypto āasset classā to the stock market, you can determine your level of risk, through skewing it more towards the latter categories.
Just came across this article that suggests that thereās some movement in this direction generally, with Vanguard offering private equity as an investment class.
Couldnāt you argue that youāre actually moving towards the ātrueā global market portfolio, which would include many non-publicly-traded assets? (Similar for real estate: seems plausible that people should overweight REITs in their portfolios.)
Not sure this is true if the risk is also higher.
Because the companies included in the private equity ETF are also already represented in the global market portfolio, the percentage of the market cap /ā total market cap is already includes what the market believes to be the discounted future profits of all non-publicly-traded assets that the private equity (e.g. Blackstone) invested in.
Yes, beta (and risk) are higher and so alpha and the expected returns are higher, but thatās the trade-off so thereās no free lunch. Itās similar to foregoing bonds and only investing in stocks in oneās portfolio, but even riskier.
I think weāre talking past each other a bit. The claim isnāt that itās directly valuable to overweight publicly traded private equity companies in oneās portfolio. Rather, the claim is that:
The true global portfolio contains much more private equity than the publicly traded market. This estimates that PE is about 3.6% of the global portfolio.
So ideally oneās portfolio (if youāre trying to mimic the global market portfolio) would be about 3.6% PE.
But just buying an equities index fund will underwight PE as an asset class because most PE isnāt public.
You can simulate the true global market portfolio by overweighting public PE if you think public PE should perform similarly to PE broadly.
Oh I see- thanks for clarifying! This is a very interesting idea, but somehow it still seems counterintuitiveā¦ by the same logic, wouldnāt you also want to overexpose yourself to e.g. publicly traded real estate because most of it isnāt public?
If true, and if most passive (institutional) investors arenāt sufficiently exposed to PE (or real estate), wouldnāt that suggest that the market undervalues this asset class and you can beat the market by investing in it? Honest question, I havenāt thought this through very well, but something still feels counterintuitive that you could create a better passive global market portfolioā¦
I think this might be another big ifā¦ though also one should be surprised if thereād be a big discontinuous jump in returns when going from non-traded to traded.
Yes, I think that is true as well!
This is what I was getting at by noting that PE should also be higher beta, so the risk-adjusted returns should not be higher!
Hm, very possible I am thinking about this wrong, but itās pretty intuitive to me. After all, isnāt the ātrueā global market all investable assets, not just publicly traded assets? Itās the same reason why the Nasdaq Composite is a poor stand-in for the global stock market: for a variety of reasons, it only has a certain subset of publicly traded equities, and other baskets of equities have different risk-return profiles.