The original argument for private investing, as opposed to holding publicly-trades stocks and bonds, made by the Yale economics department a generation ago, was two-fold:
–universities with strong endowments were, in theory anyway, paying an unneeded extra premium for investments that had no instant liquidity. Sort of like going to a dealer and buying a car with a convertible top that you knew in advance you’d never use. Universities didn’t need instant liquidity. Therefore, it should be able to get higher returns by finding things to buy that weren’t that liquid. Arguably, too, companies without publicly traded equity should be willing to sell shares at a discount to their intrinsic worth
–arguably, early entry into companies with superior growth potential would pay off unusually well as they matured and either became more liquid by going public or were acquired at a premium price buy a larger rival
It isn’t a great stretch of the imagination for one to go from prime private equity assets to private debt and to private credit–and to argue by analogy (a weak way of operating, according to Aristotle) that the same kind of premium should accrue to them.
One of the main continuing attractions of private stuff is that there’s no requirement for their values to be calculated every day, based on the results of public trading. Under normal circumstances, if the S&P 500, a recession that pushes the S&P 500 down by, say, 25% over a number of months there would arguably be no need to mark down private equity/debt values as well.
Most entities other than governments and unions have dealt with ERISA rules on pensions by shifting from defined benefit plans to defined contribution–from a promise of a pre-determined level of payments by the pension sponsor, to a promise of steady contributions to a pool of money that becomes the employee’s on retirement.
Sponsors of traditional pensions know that public markets tend to yo-yo with the business cycle–in what we all hope with be a jagged upward path that may be +30% one year and -20% the next. But this also means that two down years in a row for the public markets can give the impression that the employee pension plan is seriously underfunded. The fact that private equity doesn’t make Mr. Market adjustments to the downside in these regularly occurring situations must be a considerable relief to politicians who might need to add funds to erase the appearance of weak solvency.
What I find most interesting about the private markets is that as the Trump administration has attacked higher education endowments–Yale, in particular (where I spent six years as a graduate student)–the plans have apparently found that their investments were unable to be sold at prices equal to or above their carrying values. Not necessarily a crisis, but food for thought.