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This feels like a bad take unless one has some data on how often it turns out OK. If it frequently does, the implications of the first bit seem off

cs702 4y ago
Whether the declines in valuation turn out to be permanent or temporary doesn't matter, institutional investors are incentivized not to recognize them in the short run.
- funstuff007 4y ago
  They want held to maturity accounting treatment on all the things.
  - cs702 4y ago
    It's not that. It really is mark-to-make-believe: Institutional investors want PE managers to ignore declines in public market valuation multiples because if the managers were to value their PE investments at current multiples, the investors would have to write off the value of their PE holdings. For example, say a PE fund invested in a new EV company a bit over a year ago, at a valuation 10x trailing revenues, and then the fund doubled the valuation of that investment to 20x trailing revenues because Tesla (TSLA) was trading at 20x. All investors happily went along because they could show a +100% gain on this investment by the fund. Now, however, TSLA is trading at 4x trailing revenues, but the fund manager contends that it should ignore a capricious stock market and treat the investment in the EV company instead as if it were still worth 20x. All investors in the fund are happy to go along with that too, because otherwise they would have to recognize and report a loss of ~80% on the fund's EV investment.
    - oneoff786 4y ago
      But are those numbers realistic and representative? How much higher will they be marked, and more importantly, how well correlated are the “make believe” prices to eventual selling prices
berkle4455 4y ago
Ponzi schemes all work until they become insolvent.
anm89 4y ago
Not at all a bad take. The PE model has only existed during the ~40 year period that were an extreme outlier in terms of bond performance, liquidity, and equity return averages. They've never had to suffer a tail event that wasn't papered over with cheap money, even though we know historically that the papering over of business cycles is not a game that can last indefinitely. Demanding "data" from other people without explaining why that person has the burden of proof to produce data for something they have already explained while the requester has simultaneously also provided no data on anything is one of the laziest and lowest value takes that frequently gets repeated on here.
- oneoff786 4y ago
  My claim is that if you don’t have data showing that PE doesn’t tend to deliver on its valuations then it’s probably not justified to attack them for not updating their valuations. Adjusting for market conditions may not be a good model. I don’t know this to be true, but I feel like I’m claiming the null hypothesis here. That it’s not determinable. PE held companies are not liquid and undergo significant changes.

cs702 4y ago

Whether the declines in valuation turn out to be permanent or temporary doesn't matter, institutional investors are incentivized not to recognize them in the short run.

funstuff007 4y ago
They want held to maturity accounting treatment on all the things.
- cs702 4y ago
  It's not that. It really is mark-to-make-believe: Institutional investors want PE managers to ignore declines in public market valuation multiples because if the managers were to value their PE investments at current multiples, the investors would have to write off the value of their PE holdings. For example, say a PE fund invested in a new EV company a bit over a year ago, at a valuation 10x trailing revenues, and then the fund doubled the valuation of that investment to 20x trailing revenues because Tesla (TSLA) was trading at 20x. All investors happily went along because they could show a +100% gain on this investment by the fund. Now, however, TSLA is trading at 4x trailing revenues, but the fund manager contends that it should ignore a capricious stock market and treat the investment in the EV company instead as if it were still worth 20x. All investors in the fund are happy to go along with that too, because otherwise they would have to recognize and report a loss of ~80% on the fund's EV investment.
  - oneoff786 4y ago
    But are those numbers realistic and representative? How much higher will they be marked, and more importantly, how well correlated are the “make believe” prices to eventual selling prices

berkle4455 4y ago

Ponzi schemes all work until they become insolvent.

anm89 4y ago

Not at all a bad take. The PE model has only existed during the ~40 year period that were an extreme outlier in terms of bond performance, liquidity, and equity return averages. They've never had to suffer a tail event that wasn't papered over with cheap money, even though we know historically that the papering over of business cycles is not a game that can last indefinitely. Demanding "data" from other people without explaining why that person has the burden of proof to produce data for something they have already explained while the requester has simultaneously also provided no data on anything is one of the laziest and lowest value takes that frequently gets repeated on here.

oneoff786 4y ago
My claim is that if you don’t have data showing that PE doesn’t tend to deliver on its valuations then it’s probably not justified to attack them for not updating their valuations. Adjusting for market conditions may not be a good model. I don’t know this to be true, but I feel like I’m claiming the null hypothesis here. That it’s not determinable. PE held companies are not liquid and undergo significant changes.