Academic research for LPs Private Capital Conference 27&28 June 2019

Shall we care about fees? No Higher fee = higher performance (Robinson-Sensoy) I eat net returns Yes Ethical reason Forward looking more important than backward looking

Performance metrics Why are people fed IRR-based statistics when we know they are useless? Use of subscription lines only make an absolute joke of a measure that was already a joke Why and how people are influenced by IRR? Ignorance or career concerns?

Benchmarking Looking good now that we switched to MSCI world as a benchmark? How comfortable are we with having used S&P 500 when that index had the worse performance ever and then switching to the new worse performance when the S&P 500 is performing in line with average stock again? How much awareness is there that indices have alpha? Benchmarking against vintage returns: Is that meaningful when we can now cut and dice in thousands of ways the vintage benchmark?

Past ten and twenty years 1999-2008, US large cap do poorly Small and mid-cap outperform by 5%, PE do too (by as much) NB: Some indices in small/mid-cap space also perform poorly by design PE outperforms strongly listed equity portfolios of Asset Owners (AOs) AOs with more PE outperform peers 2009-2018, US large cap has same perf as rest of stocks PE has the same return as S&P 500 AOs (including Yale) performance is very similar across one another and same as 60-40 stock-bond allocation But Emerging markets in USD do poorly

Looking forward Valuations in PE are at all-time high, but so are they in public markets But can we trust EBITDA numbers (hence PE official entry valuations and leverage levels) In a low-return environment, large fixed fees bite disproportionately Are we comfortable with level of management fees? And with funds having 100% catch-up, deal-by-deal carry, and reduce hurdle rate in such an environment? If people are allowed to charged discretionary fees on assets, what will happen in a downturn? Tons of misleading marketing of past performance, persistence etc. might have led to lots of dumb money in, isn’t it in the best interest of all to have standards, rules, simplified documents etc?