For the better part of a decade, institutional investors have redeemed capital from active strategies and dumped it into Private Equity (PE). What’s the benefit of PE for allocators? You get to have levered equity returns without the volatility of actually owning public equities. Unlike stocks that often fluctuate wildly, PE is marked-to-model (M-T-M), hence quarterly volatility is minimal. Then, when there’s a liquidity event, you get to see how well you did.

Or at least, that was the theory. However, by the time of the liquidity event, usually someone else is in charge of the position. Meanwhile, you’ve used the nice smooth M-T-M to earn yourself a bunch of bonuses and maybe even a promotion to somewhere else that’s ring-fenced from your allocation decisions at your prior job. In many ways, the funds and the allocators themselves are both incentivized to mark the numbers higher and hope that they’re proven right…..CLICK for complete article