Oxford has just posted professor Ludovic Phalippou’s “taster” presentation for his private equity class, using the same August Investment Committee meeting that we featured in our CalPERS’ Private Equity, Exposed series as a teaching tool.
This is a short and lively talk, since it is designed for MBA students who are new to private equity, and Phalippou gets very high marks from students for his lectures. It will be helpful both to readers who are new to private equity, since Phalippou explains how the biggest fees paid to private equity firms work, and to regular readers, since he makes quite a few of the “devil is in the details” features accessible.
It was a bit disappointing to see Oxford take the odd view that a video of a public board meeting that CalPERS put on YouTube and made freely embeddable to be copyrighted. Did all the members of the public who spoke assign their rights over to CalPERS?
We have the video clips and transcripts of the sections that Phalippou refers to here (with Priya Mathur) and here (with JJ Jelincic). But his presentation is completely comprehensible without seeing the underlying recordings.
You will note that Phalippou strives to be even-handed in his discussion. For instance, he goes to some length to point out that the example that CalPERS chose to present to the board of a fund presentation and the fees paid is representative, even when he creates a detailed model based for a “middle of the road” CalPERS fund. Nevertheless, some things still stand out:
1. The degree to which CalPERS’ staff seeks to minimize the magnitude of fees that private equity firms extract. Phalippou flags an obvious way in which CalPERS staff misled the board was misled regarding the amount of the biggest fee that investors like CalPERS pay to private equity general partners. CalPERS’ head of private equity Réal Desrochers kept claiming it was just like any other asset class, while Phalippou makes clear that private is the most expensive asset class, based on management fees (which Desrochers incorrectly depicted as being at the same level as for other asset classes) and in total, which Phalippou estimates at 7% per annum.
2. The degree of evasiveness and inconsistent positions taken by CalPERS staff
3. The amount of ground that Phalippou covered in his talk to MBA students that assumes they have no previous knowledge of private equity, versus the dumbed-down presentation given to CalPERS board members who are overseeing what is almost certainly the biggest private equity portfolio in the world. And that’s before you get to the poor questions some of the board members asked (we actually spared readers some of the worst in our CalPERS series, since it would have amounted to beating a dead horse). As a law professor who watched the August presentation wrote us:
It’s shocking to see how many of the CalPERS investment committee are utterly ignorant. wtf?! Aren’t these people supposed to know something?
Please take a few minutes to watch this instructive talk.