Season 3 Episode 29:
Inconvenient truths about private equity with Ludovic Phalippou

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This week we speak to Ludovic Phalippou, Professor of Financial Economics at the Saïd Business School. Ludovic found himself at the centre of a storm two years ago following the publishing of his paper, 'Inside the billionaire factory', which takes a critical look at private equity and many of the questionable practices which take place in the marketing and allocating to these funds. We recap the paper and cover some of the core ideas including the concept of IRR and why this is such a flawed and potentially misleading way to measure returns.

Links mentioned:

We discuss:

  • It's been almost two years since **that** paper, we ask Ludovic:
    • Firstly for listeners unfamiliar just give us a quick overview of what it was (and why it was so controversial) 
    • Can you give us some background on why you wrote the paper, why that issue, why then
    • How would you reflect now on how it’s been received, the profile it’s got you and where things are at?
  • Let's get into the detail of some of the key areas
    • IRR's - what's wrong with them and why does it matter?
    • Making effective comparisons between private markets and other assets, why this is hard and why it influences behaviour
    • How should investors think about private markets
    • The putback you sought and received from managers and what, if anything, you took from that
  • We ask the big question: what’s Ludovic’s overall view of private equity as an investment 
  • What are some other important stories going under the radar that investors are missing? 
  • Next projects: we discuss what Ludovic is looking at over the next 12 months including a listed index of private equity. 

What's one thing to take away

Be sceptical about marketing in private equity: it’s unregulated, so educate and inform yourself. Be careful of the information you receive for free from marketing people.

The most underappreciated thing about investing?

The element of luck in investing. We tend to think of people as “heroes” – and the corollary is that if someone has made a lot of money they must be very clever (and able to repeat it). But often there is a loophole that was successfully exploited in the past which may have closed. 

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