Diary of a Hedgehog: Biggs' Final Words on the Markets

Private Equity

I am on a board of a $2 billion foundation and last year at the fall meeting the investment adviser proposed that we gradually move from a 12% allocation in private equity (PE) to a 30% position. The fund was as high as 28% in PE in 2006 with a net return of over 20%, and the adviser then strongly recommended cutting the position in half. The board agreed, and the adviser implemented by actually selling the positions in a number of the funds at a premium. Thus the board was receptive to this new allocation but a number of us wondered if 30% in an illiquid asset wasn’t too high. It was pointed out that in 2008 and 2009 endowments and pension funds with high PE allocations suffered painful liquidity crises. I offered to do some work. Here is my report.

December 2, 2011

I have talked with a number of people about private equity (PE) most of whom are friends to a greater or lesser degree and all of whom are serious, professional investors responsible for other people’s money. I told them I was trying to refine my view of PE as an asset class for the next 5 to 10 years in the context of the appropriate asset allocations for a $2 billion fund that was an active, multi-asset investor with a long horizon, real return, growth objective. I did tell them that the fund had an annual payout requirement. I was not more specific than that.

What did they think, I asked, of PE in ...