Thursday, February 22, 2007

Michael Lewis on Private Equity vs. Mutual Funds

I caught a Michael Lewis (author of the fantastic book "Liar's Poker," which introduced many a young fellow to the world of Wall Street) opinion piece on my Bloomberg terminal today and I felt it was worth passing along. You can read it here.

His basic premise is that there are some investments that rich people can make, i.e. private equity investments, that the middle class cannot. He further argues that the rich make 20% annual returns off of their private equity investments while the middle class are happy with their mediocre mutual fund returns.

I have only had one recent brush with private equity, and that came when Yankee Candle (NYSE:YCC), a company whose stock I owned, was bought out by a private equity firm. I had a lot of questions as to whether or not that transaction was on the up-and-up, but I'll save those for another blog entry.

I don't think this is as big a deal as he makes it out to be. Private equity returns run in cycles just like every other asset class. Yes, you have to have a lot of money to invest in PE funds in most cases, but this is an investor protection, not a scam designed to make money for the rich. Private companies don't have to provide the kinds of disclosure public companies do, and as a result I think they make for riskier investments. If you're rich and you lose your $1m investment, chances are you can shrug it off. If $1m is your entire net worth and you lose it, chances are you are not going to be able to recoup the losses.

Has anyone else had any experience investing in private equity funds and care to shed some light on the subject?


Atlas is here said...

He is full of you know what. When things are humming, the PE folks can make a ton of money. One can also make a ton of money owning a handful of indicies including international and emerging markets. And just like every other market, the PE area will dry up. They are enjoying a tailwind from sarbox pushing companies to privatize and a ton of liquidity in the world. Enjoy the ride.

by the way, owning shares of berkshire probably beat whatever scheme/strategy Mr. Lewis was touting!

MoneyMan said...

I agree, I generally don't subscribe to the notion that there are secret investments that only rich people can invest in that are some kind of guaranteed moneymaker.

Yes, there are investments limited to high networth individuals, or people seen as having particular expertise, but these are not necessarily the best places to put your money and in many cases are much more risky than the funds and stocks us common folk invest in.