MARKET TENOR
Cliff Asness, the co-founder of AQR Capital Management, raises a couple of interesting questions about investing in private equity in a recent Morningstar podcast that speak to his background as a “quant” who runs one of the largest and most successful quant-focused funds.
Asness questions whether private equity investors are “paying up” to invest in PE to avoid public market volatility whereby portfolios are marked-to-market each day. He thinks the answer is yes, and in doing so PE investors have (or may have) shifted to paying a premium for illiquidity. It seems like a preposterous notion because illiquidity is a universally accepted risk factor that is priced by investors by adding a premium to the discount rate.
Nobel Prize winner Daniel Kahneman, the father of modern behavioral economics, might argue Asness is not off base because individuals feel more pain from a loss compared to an equivalent gain. The dopamine released in a bull market is outweighed by the bile released in a bear market.
Marking private equity and credit investments in the second half of 2022 will be tricky compared to halcyon days of roughly 4Q20 through 1Q22 when monetary spigots were wide open and asset prices for everything boomed. Since then, a bear market has enveloped markets as central banks shift to fighting inflation. As of June 17, the S&P 500, NASDAQ and Russell 2000 indices are down 23%, 31% and 26% year-to-date. IPO and M&A activity has declined sharply, too.
FEATURE ARTICLE
Always Cash Flow and Earning Power
Also in This Issue
Updated Metrics for
Private Credit and Equity
Publicly Traded Private Credit
Venture Capital