Remarks to the SEC Asset 

Management Advisory Committee 

Private Investments Subcommittee

September 16, 2020

Josh Lerner

Harvard Business School
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Josh Lerner: Background and experience.

• About me:

 Jacob H. Schiff Professor in Entrepreneurial Managem ent and Finance

units, Harvard Business School.

 Bachelor’s from Yale University and Ph.D. from Harvard in econom ics.

 Research focuses on the structure and role of VC and PE organizations.

 Co- director, National Bureau of Econom ic Research’s Productivity,

Innovation, and Entrepreneurship Program .

 Founded the Private Capital Research Institute, a non- profit devoted to

encouraging access to data and research about VC and PE.

 Winner of the Swedish governm ent’s Global Entrepreneurship Research

Award and Cheng Siwei Award for Venture Capital Research

 Advises lim ited partners, general partners and governm ent bodies

interacting with private capital.

• For m ore inform ation see www.bellaprivatem arkets.com.
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* Compared to assets such as public equity and fixed income.

Introductory comments.

• Big questions!

• Caveat: Researching PE is difficult due to data constraints.

 The “private” nature of the industry m eans that data can be incom plete

or inaccessible in m any cases.

 Further, PE is a newer asset class* with less history to research.

• With that in mind, I will present a few takeaways from recent

research to provide insight on these issues.
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Source: Ang, Andrew, Bingxu Chen, William N. Goetzmann, and Ludovic Phalippou. “Estimating private equity returns from limited partner 

PE has potential diversification benefits. 

• A recent study shed light on the extent of PE’s potential 

diversification benefits.

 Ang et al. (20 18 ) analyzed PE returns over time.

 The study found “cyclicality” in PE returns.

• That is, returns fluctuated up and down over tim e.

• Importantly, the study found that cyclicality differed based on the 

type of fund (such as venture capital or buyout).

 That is, one type of fund m ight perform well while another perform s

poorly.

• Per the authors: “We find that the [private equity] premium is highly 

persistent and considerable diversification can be obtained within 

just the PE domain.”

 Such diversification should make PE attractive to retail investors.

cash flows." The Journal of 

Finance 73, no.4 (2018): 1751-1783.
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• I compare performance of PE and public markets using a PME.

 PMEs (Public Market Equivalents) show the relative perform ance of PE

com pared to sim ilarly-tim ed investm ents in public m arkets.

• In recent years, PMEs show only slight outperformance relative to

similarly timed public market investments.

 PMEs close to 1.0 .

However, PE only slightly outperforms public markets.

*Ka p la n - Schoar PME. The Russe ll 30 0 0 re p re se n t s ap p roxim at e ly 9 8 % o f t he US e q uit y m arke t .

So urce : Pre q in Priva t e Ca p it a l Be n ch m a rks. As a t De ce m b e r 3 1, 20 19 . Acce sse d o n Se p t e m b e r 3 , 20 20 .

1.13 1.11 1.11

1.23

1.0 6

1.20

1.14

1.0 5 1.0 7

1.12

1.0 2 1.0 3 1.0 1

1.44

1.18

0 .73

1.0 6

0 .89

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Vintage year

North American PE Funds versus Russell 3000 KS-PME*
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• The median TVPI of PE funds has fallen in recent years.

 The TVPI (total value to paid in) m easures the cash returned plus the

rem aining value of the investm ents com pared to the am ount invested.

• Using this metric, returns show a clear downward trend.

And returns have been falling.

So urce : Ca m b rid ge Asso cia t e s. “Priva t e e q uit y: In d e x a n d se le ct e d b e n ch m a rk st a t ist ics.” Ma rch 3 1, 20 20 : p . 3 1.

1.83

2.24

1.96 1.98

1.70 1.66 1.66 1.72

1.88

2.31 2.37

1.74 1.63 1.54 1.46

1.28 1.26

0 .99

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Vintage year

Pooled net TVPI by vintage for US PE
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Source: Metrick, Andrew and Ayako Yasuda. “The economics of private equity funds.”The Society for Financial Studies (20 1 0 ).

Strauss, Lawrence C. “Th e problem wit h private - equity funds fo r t h e ma sse s.” Barrons , March 2 6 , 2 0 16 . h t tps:/ / www .b arron s.com/ art ic le s / p itch in g - private - e quit yt o -t h e - ma sse s- 1458 9700 75. Accessed S eptem ber 9, 2 0 2 0 .; “ALP S | Re d Ro c ks listed p rivate equ it y fund c lass A: LP EFX.” Charles Schwab. Generated September 9, 

2020.; Papagiannis, Nad ia . “P rivat e e q u it y f u n d s for t h e masse s : What in v e s t ors should kn o w b e fore t h e y d iv e in .” Morningstar. April 11, 20 13. 

h t t p s://www.morningst ar.com/a rticles/5 91832/p riva t e- equity- funds- fo r- t h e - ma sse s. Accessed September 9 , 2 020 .

Further, fees for retail products are high. 

• Investors in PE funds (LPs) pay high fees for investment products

already.

 Generally 2% on the capital invested in a PE fund plus 20 % of profits

(called “carry”).

 The study noted that buyout fund managers in particular earn high fees

on a “per partner” basis.

• Retail-focused PE products have typically had an additional layer of

fees.

 In addition to the underlying “2 &20 ” fees associated with PE funds.

 A few examples of such additional fees from past/ existing products:

• 1.2% management fee, sa les load of up to 3.5%, and redemption fee of 2.0

%.

• 1.75% in management fees and operating expenses.

• 2.31% expense ratio for a PE mutual fund product.

o Much higher than the 1.32% average for mutual funds in the same category (World 

Small/Mid Stock funds ).

 May negate all of remaining alpha.
• Co-investments are 

made alongside a 

fund.

 Rather than through

the fund itself.

 They generally have

lower fees than

investing in the

fund.

• A recent study found 

that co -investments 

are increasingly 

popular.

Some see co-investments as a solution.

N o te: Alternat ive veh ic le s in c lude both d iscret ionary and GP - d irected v e h ic les.

S o u rce : Le r n e r , Jo sh, Jason Mao, An t o in e t t e S c h oar, a n d Nan R. Zhan g . “Investing out sid e t h e b o x : Evidence from alternative vehicles in private equity.” Harvard 

Business School Entrepreneurial Management Working Paper No. 19-012, Harvard Business School Finance Working Paper No. 19-012 (2020 ).

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• Using data for 1980-2017, the same study found that alterative 

vehicles (i.e., co-investments) underperformed the main fund.

 Driven by large negative investments.

• However, alternative vehicles formed between 2009 and 2014 

were shown to outperform the main fund on average.

 The improvement was driven by discretionary investments by LPs.*

• Rather than investments dire cted by the fund manage rs.

• This signals that LPs are learning (or a forgiving market).

However, co-investments can be challenging.

*Limited p artners (LPs) are the groups that c o m m it cap ital t o a P E fun d that is th e n in vested b y the fun d m a n age r in t o c o mpanies/ d e a ls.

Note: Alternat ive veh ic le s in c lude both d iscret ionary and GP - d irected v e h ic les.

Source : Le rner, Josh, Jason Mao, An toinette S choar, a n d Nan R. Zh ang . “In vesting out sid e t h e b o x : Ev id e nce from a l t ernative v e hicles in private equity.” 

Harvard Business School Entrepreneurial Management Working Paper No. 19-012 Harvard Business School Finance Working Paper No. 19-012 (20 20 ).

Adjusted excess PME performance of alternative vehicles (i.e. co-investments)

Year of Formation N Weighted avg. p-value Median

1980-2017 1,467 -0.0582 0 .0 10 0 .0 0 2

2009 -2014 486 +0.058 0 .0 0 9 0 .0 0 5
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Final thoughts

• There are reasons that PE can be attractive to retail investors.

 Such as potential diversification benefits.

• There are also reasons that PE might not be an appropriate

investment for some retail investors.

 Data on fees and recent perform ance suggest potential drawbacks.

• I hope these remarks are helpful to the committee in its

deliberations.
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Jacob H. Schiff Professor 

Entrepreneurial Management Unit

Harvard Business School

Boston, MA 02163 USA

josh@hbs.edu

www.people.hbs.edu/jlerner

Thank You!

Josh Lerner