Does the (il)liquidity premium (if it still exists) not suggest that privates can outperform public equities? In other words, if you don't require liquidity then you can get paid for that. Conceptually similar to a "term premium." Of course, if the (il)liquidity premium has been bid away then this wouldn't work but the concept would provide a theoretical underpinning for why allocations to privates might work.
Conceptually, the premium (which has vanished) was embedded in the price discount vs. a liquid analog that was a natural outgrowth of few participants on the bid side, limited information and an urgency on the part of sellers (mostly conglomerates needing to realize the “sum of the parts” that markets and activists wanted). This lasted until the Drexel era, when borrowing solely on the basis of access to Milken’ s graces allowed a few raiders to bid whatever was necessary to win. Often, the size of borrowing available through the junk market was so large that there were few bidders who might compete. A potential source of structural return premium if the asset was really undervalued and large. Less discipline and many more failures by the raiders as opposed to the PE firms. Who were still very disciplined about entry prices. All of those advantages have gone away now that there are thousands of PE firms and PC funding sources willing to compete for volume rather than insisting on advantageous terms and doing serious underwriting. The demand reached a point at which prices paid for private businesses were substantially higher than for the comparable publicly traded company. The premium return, if embedded, has to come from something structural in the overall market for private assets-I can’t find any structural sources of premium returns anywhere other than the exceptional execution skills of individual managers, which are exceedingly hard to confirm from a non-insiders position.
Does the (il)liquidity premium (if it still exists) not suggest that privates can outperform public equities? In other words, if you don't require liquidity then you can get paid for that. Conceptually similar to a "term premium." Of course, if the (il)liquidity premium has been bid away then this wouldn't work but the concept would provide a theoretical underpinning for why allocations to privates might work.
Conceptually, the premium (which has vanished) was embedded in the price discount vs. a liquid analog that was a natural outgrowth of few participants on the bid side, limited information and an urgency on the part of sellers (mostly conglomerates needing to realize the “sum of the parts” that markets and activists wanted). This lasted until the Drexel era, when borrowing solely on the basis of access to Milken’ s graces allowed a few raiders to bid whatever was necessary to win. Often, the size of borrowing available through the junk market was so large that there were few bidders who might compete. A potential source of structural return premium if the asset was really undervalued and large. Less discipline and many more failures by the raiders as opposed to the PE firms. Who were still very disciplined about entry prices. All of those advantages have gone away now that there are thousands of PE firms and PC funding sources willing to compete for volume rather than insisting on advantageous terms and doing serious underwriting. The demand reached a point at which prices paid for private businesses were substantially higher than for the comparable publicly traded company. The premium return, if embedded, has to come from something structural in the overall market for private assets-I can’t find any structural sources of premium returns anywhere other than the exceptional execution skills of individual managers, which are exceedingly hard to confirm from a non-insiders position.
Great answer, thank you for explaining