Tech vs. Value, and Private Equity vs. Public Equity (EP.205)

Episode Summary

Executive Summary: This episode covers show updates, a book review of James P. Carse’s finite/infinite games framework, recent evidence on markets and wellbeing, and a deep dive into private equity. The hosts argue that private equity’s reported returns are often misleading (especially IRRs), that many apparent advantages stem from illiquidity and accounting, and that public-market alternatives may offer similar or better exposures at lower cost.

Main Topics: Podcast and community updates (Priority: 3/5): The hosts announce a lower asset minimum, offer a new financial wellness talk to Canadian groups, request more survey responses from women to reduce response bias, and preview several upcoming guests and audience feedback. Finite vs. infinite games book review (Priority: 5/5): Benjamin reviews James P. Carse’s 'Finite and Infinite Games,' emphasizing the difference between winning-oriented finite games and purpose-oriented infinite games, and linking the concept to creativity, resilience, culture, and life satisfaction. Market style rotation and factor research (Priority: 4/5): The hosts discuss Meta moving into the value index, Cliff Asness’s analysis showing value isn’t just a tech story, and a paper challenging the idea that low interest rates mechanically imply lower expected stock returns. Canadian social survey and wellbeing data (Priority: 4/5): They highlight Canada’s new quality-of-life framework and survey results on life satisfaction and meaning/purpose by province and demographic groups, noting regional and rural/urban differences. Private equity performance and measurement (Priority: 5/5): A major segment critiques private equity evaluation methods, arguing that IRRs are misleading, PME and multiples are better but benchmark-sensitive, and that net-of-fee private equity often looks similar to public markets. Private equity’s risks, premiums, and illusion of diversification (Priority: 5/5): They examine illiquidity, return smoothing, accounting effects, and factor exposures, concluding that private equity may not offer a distinct premium after fees and may largely replicate leveraged small-cap/value exposure available in public markets.

Key Arguments: IRRs are not directly comparable to public-market returns because they are heavily influenced by cash flow timing and early fund success, making them 'sticky' and potentially misleading. Multiple of money and PME are better tools for evaluating private equity, but PME is highly benchmark-dependent and can overstate performance if weak benchmarks like the Russell 2000 are used. Much of the apparent value of private equity may come from exposure to small-cap and value characteristics that can be replicated in public markets, especially with leverage. Private equity’s perceived diversification benefit may be an accounting artifact caused by return smoothing and infrequent marking rather than true economic diversification. There is huge dispersion in private equity fund performance; buyout fund persistence is mainly in the worst performers, while top-quartile persistence is weak or absent. Venture capital shows stronger top-fund persistence, but average outcomes are heavily skewed and likely inaccessible to most investors. Low interest rates do not appear to imply higher total stock returns in a simple, stable way; the equity risk premium varies and the relationship is weak or absent. Wellbeing data suggest wealth and happiness are not perfectly aligned; for example, provinces with lower median income can report higher life satisfaction and meaning. The finite/infinite games framework suggests that long-term success comes from staying in the game, adapting, and remaining open to surprises rather than obsessing over a defined win.

Data Points: Asset minimum: Lowered from $2 million to $1 million - PWL Capital’s advisory minimum was reduced due to internal efficiencies Survey responses collected: Over 200 - Goals survey participation reached a stretch target Survey gender skew: About 95% male respondents - Reason for requesting more female participation in the goals survey Upcoming guest: Vanessa Bonds: Next week - Author of 'You Have More Influence Than You Think' Upcoming guest: Dan Solin: In two weeks - For the 22 and 22 reading challenge Upcoming guest: Rebecca Walker: In three weeks - Author of 'Woman Talk Money' Upcoming guest: Ludovic Phalippou: In five weeks - Oxford professor focusing on private equity Upcoming guest: Jay Van Bavel: Two weeks after Ludovic Phalippou - NYU psychology/neuroscience professor and co-author of 'The Power of Us' Life satisfaction in Canada: 51.7% rated 8, 9, or 10 - National Canadian Social Survey result Life satisfaction in Newfoundland: 61.7% rated 8, 9, or 10 - Highest provincial life satisfaction result Life satisfaction in British Columbia: 46.5% rated 8, 9, or 10 - Lowest provincial life satisfaction result Meaning and purpose in Newfoundland: 66.1% rated 8, 9, or 10 - Highest provincial meaning/purpose result Meaning and purpose in British Columbia: 54.6% rated 8, 9, or 10 - Lowest provincial meaning/purpose result Retired respondents’ life satisfaction: 60.1% rated 8, 9, or 10 - Higher than working respondents Working respondents’ life satisfaction: 51.7% rated 8, 9, or 10 - Same as sample average Rural life satisfaction: 57.6% rated 8, 9, or 10 - Higher than population centers Urban life satisfaction: 50.6% rated 8, 9, or 10 - Population centers result Rural meaning/purpose: 65.0% rated 8, 9, or 10 - Higher than urban areas Urban meaning/purpose: 57.5% rated 8, 9, or 10 - Population centers result Meta weight in value index: 1.8% - Estimated after reconstitution discussed in the episode Meta weight in growth index: 0.49% - Estimated after reconstitution discussed in the episode Meta 52-week high: $384 - Compared with current price around $165 in the discussion Russell 2000 annualized return (1994-Apr 2020): 8.66% - Used to illustrate benchmark weakness in private equity comparisons S&P SmallCap 600 annualized return (1994-Apr 2020): 10.44% - Alternative small-cap benchmark Dimensional US Small Cap Index annualized return (1994-Apr 2020): 11.58% - Alternative small-cap benchmark S&P 500 annualized return (1994-Apr 2020): 10.11% - Used in benchmark comparison Russell 2000 Value annualized return (1994-Apr 2020): 9.57% - Alternative benchmark for private equity PME analysis Dimensional US Small Cap Value annualized return (1994-Apr 2020): 13.04% - Shows how benchmark choice can matter materially Buyout fund average PME: 1.2 - From a cited 2014 paper on private equity performance Buyout fund median PME: 1.11 - Same study, showing modest outperformance Venture capital average PME: 1.2 - Average performance in the same study Venture capital median PME: 0.88 - Shows strong skew and poor median outcomes Buyout PME vs Russell 2000 Value: 1.07 - Average PME falls when benchmark changes Private equity overall multiples of money: 1.57 - From Phalippou’s analysis Buyout multiples of money: 1.65 - From Phalippou’s analysis AQR estimated current vintage US buyout expected return: 5.9% net of fees - Q1 2022 expected-return assumption cited in discussion AQR equities with factor tilt expected return: ~5.0% real - Comparison used to show buyouts may offer only modest incremental expected return Private equity industry billionaires created: 19 new billionaires from 2005-2020 - Phalippou’s framing of private equity as a 'billionaire factory'

Pivotal Quotes: "Strength is paradoxical. I am not strong because I can force others to do what I wish as a result of my play with them, but because I can allow them to do what they wish in the course of my play with them." — James P. Carse: Quoted during the review of 'Finite and Infinite Games' to illustrate the nature of strength in an infinite game "An infinite player does not begin working for the purpose of filling up a period of time with work, but for the purpose of filling work with time." — James P. Carse: Used to connect the book’s ideas with creativity, meaning, and life satisfaction "Private equity is significant illegal. Liquidity and market dynamics provide suitable investors the opportunity to earn long-term excess returns while increasing portfolio diversification through expanded equity market coverage." — Vanguard white paper (quoted by hosts): Presented as the standard theoretical case for private equity before the hosts critique it

Implications: Listeners should be skeptical of private equity sales pitches, especially IRR-based ones, and should recognize that public markets may replicate many private-market exposures more cheaply. The episode also reinforces a broader theme: long-term investing and life satisfaction are often about staying flexible, not chasing headlines or status.