Hulbert: Private Equity Funds' Superior Performance 'Largely an Illusion'

Tuesday, 09 Jul 2013 09:40 AM

By Dan Weil

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Private equity fund managers tout superior performance of their portfolio companies as a chief benefit of their asset class.

But a new study shows that this supposed advantage is "largely an illusion," Mark Hulbert, editor of the Hulbert Financial Digest, writes in The Wall Street Journal.

"It is understandable why many people would believe a company should do better after going private," he notes. "Freed of the short-term constraints of keeping Wall Street happy, such companies can instead invest in what will best promote their long-term advancement.

Editor's Note:
An $87,500 Tax Loophole Discovered by Cherry Hill Accountant

But the study, which has been accepted for publication by the Journal of Financial Economics, debunks that myth by analyzing the corporate tax returns of more than 300 firms taken private by private-equity firms between 1995 and 2007.

"After going private, the researchers concluded, such companies didn't perform any better on average than they did before," Hulbert explains. They based their conclusions on sales, return on assets, economic value added and other performance metrics.

"These findings don't mean that the average buyout firm can't produce impressive returns," Hulbert stresses. "It just means that improved operating performance isn't the source of those outsize returns."

Whatever the case, investors continue to pour money into private equity. According to Dow Jones LP Source, U.S. private equity funds attracted $103.19 billion in the first half of the year, up 16 percent from the year-earlier period.

Some of the buying came from investors who have become underweighted in private equity, as the rising stock market pushes the value of their public equities holdings higher, according to Dow Jones.

Editor's Note: An $87,500 Tax Loophole Discovered by Cherry Hill Accountant

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