•Press Release Private Equity United States Wall Street
Washington — Private equity’s shining promise of strong value in the midst of a turbulent stock market seems to defy the laws of financial gravity. CEPR’s new analysis reveals that much of PE’s advertised value is an illusion.
PE experts, Johns Hopkins University’s Jeffrey Hooke and CEPR’s Eileen Appelbaum, explain that at the heart of the PE myth is the value of unsold companies in PE fund portfolios.
“The guesstimates of the value of a PE fund’s unsold inventory form the basis for the myth of strong performance that will serve as a hedge against a falling stock market,” said co-author Appelbaum.
Unsold companies in PE portfolios are illiquid assets with unknown value until they are sold. The reported value is “a figment of the PE managers’ fertile imaginations,” according to the analysis. Furthermore, the failure to adjust the values of unsold companies sitting on the shelf, sometimes for years, inflates the fund’s value and the illusion of strong performance.
“It’s no wonder pension fund managers routinely claim that their PE investments are their best performing assets,” exclaims Appelbaum.
Hooke and Appelbaum use the massive California state public employees’ pension fund, CalPERS, to dispel the myth. They find nearly half the value of CalPERS PE investments between 2009 to 2016 are “just educated guesses by PE fund managers.”
“Investors should take a lesson from the tale of the Spider and the Fly. Don’t be fooled by the flattering values PE funds use to attract their targets,” warned Appelbaum.