Is private equity overestimated?


“You can’t see how a fund is actually performing until it’s liquidated after 10 years, so you’re assuming what the general partner says the companies in that fund are worth,” said Eileen Appelbaum, the fund’s co-director. Center for Economic and Policy Research, which has written extensively on private equity.

Longtime critics such as Ms. Appelbaum and Mr. Phalippou say the typical method used to report results to investors, known as internal rate of return, or IRR, is easy to play.

‘It is certainly very misleading, said Mr Phalippou.

But, Ms. Appelbaum said, “the private equity guys love it.” For example, she said that if a 10-year private equity fund buys 10 companies and decides to sell the best early on, the IRR looks great.

“You got a lot of money when you sold it, so you have a very high return,” she said. That’s because the IRR assumes that until the fund is liquidated, the profits from that sale can be reinvested at the same high rate.

The IRR methodology may be why some funds look better in their early years, especially if they’ve borrowed money to add to the investments – a growing trend. Cambridge Associates, an investment and consulting firm, estimates that such loans, which are basically short-term loans called subscription lines, can boost returns by as much as three percentage points.

Blackstone Total Alternative Solutions funds, which include buyout, credit, real estate and growth strategies, provide an interesting snapshot. According to internal marketing documents reviewed by The New York Times, BTAS 2014, the first fund in the series, had a net IRR of 7.7 percent in March after drawing 84 percent of its investment capital. But BTAS V, which launched in January 2019 and had called up only 51 percent of its capital, showed a much higher net IRR: 42.9 percent.

A Blackstone spokeswoman said these performance figures “were single-handed and misleading numbers for our BTAS program, which has delivered a net return of 16 percent since its inception in 2014.”

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