00:00:00
private equity in general is totally
00:00:01
owed. I think the history of this is
00:00:03
important. There was a long-standing
00:00:05
belief that the best way to generate the
00:00:10
best risk adjusted return was to have
00:00:13
what's called a 60/40 allocation. 60% to
00:00:16
bonds and 40% to equities. Over many
00:00:18
years, especially when we artificially
00:00:21
suppressed rates at zero, a lot of
00:00:23
people started to move their allocations
00:00:25
away from 60/40 and they started to make
00:00:27
more and more investments further out on
00:00:30
the risk curve. The biggest
00:00:31
beneficiaries of that were venture
00:00:34
capital, private equity, and hedge
00:00:35
funds. The thing with private equity is
00:00:37
that because rates were zero, they had
00:00:40
an infinite amount of borrowing
00:00:42
capacity, had very little downside to
00:00:45
them, and so they were able to
00:00:47
manufacture returns much faster than
00:00:49
venture capital and hedge funds could.
00:00:50
So, as a result, you had an initial
00:00:52
group of people that were defining the
00:00:54
asset class, making a ton of money, and
00:00:56
then you had all these fast followers
00:00:57
that said, "Well, if they're doing it, I
00:00:59
can do it, too." But then always what
00:01:01
happens is then you have this flood of
00:01:03
just lagards that just flood the zone.
00:01:06
And it's these lagards that make it very
00:01:08
difficult to generate returns because
00:01:12
they start overpaying for assets. They
00:01:14
start mismanaging and undermanaging the
00:01:16
assets that they do own. That created a
00:01:18
lot of competition. And so that's why
00:01:20
you see this hockey stick graph, Jason.
00:01:22
And when you see that kind of graph, it
00:01:25
doesn't matter what asset class it is,
00:01:27
the returns go to zero. And so we've
00:01:30
seen this in venture capital, we've seen
00:01:32
this in hedge funds, and we're now going
00:01:34
to see this in private equity.
