No Lesson Learned?

Something kind of weird happened the other day, which gave me the perfect excuse to finally talk about something I usually keep over on Twitter: the democratization of private equity.

Let’s back up.

Private Equity — PE — started as a classic finance thing. Push and pull.

A company goes public to raise money, get capital, grow. But then the founder wakes up one morning and realizes: Wait. If I just own 51% of the company, I can still control everything. Even less, sometimes. Like… way less.

So sure, you only get a slice of the profits. But now you’re slicing off costs too, because someone else (read: shareholders) is footing the bill. That $150k personal driver? If the company hires him for you, it’s a business expense. You still get the ride, but your cut of profits only dips a little, because you weren’t taking 100% anyway.

This leads to some funky incentives. If you’re a controller, not a full owner, profits don’t matter as much. Revenues do. Because the bigger the top line, the more stuff you can justify expensing: perks, empire-building, whatever. Grow the company. Don’t worry if it’s efficient.

Enter: the leveraged buyout. LBOs are like… garage sales for companies. Some smart person looks at a bloated public firm and thinks: “Huh. If I just cut all these unnecessary costs, like the CEO’s fifth assistant , I could actually make this company profitable.”

So they buy it. On the cheap. Because profits are artificially low. Then they fix it up, clean the books, and flip it. Usually back to the public markets. Profit.

And here’s the kicker: they don’t even use their own money. They borrow it. Use debt to buy the company, then use the company’s own cash flows to pay off the loan. It’s like buying a rental property with a mortgage, then having the tenant cover your payments, but on steroids and with a boardroom.

Then comes the real financial magic: the fund model.

Instead of doing all this solo, you launch a fund. That way, you get:

• A cut of the upside (carry),
• A fee for just existing (management fee),
• And zero real downside (that’s on the limited partners, lol).

Incentives: optimized.

And in a capitalist system, that kind of alpha doesn’t stay secret. Everyone wants in. So Private Equity becomes an industry. At first, it’s great. Real inefficiencies. Smart capital. Big returns.

But over time… too much money, not enough targets.

So the game changes. Now it’s about squeezing harder. Cut R&D. Cut employee benefits. Cut quality. Squeeze the lemon until it’s just pulp. But hey, as long as you sell before the rot shows, you’re good. And usually, the buyer is… you guessed it: the public market. Not exactly a vigilant gatekeeper.

And this strategy works because of leverage. If I put in 10 to buy something worth 100, and borrow the other 90, even if that thing drops to 50 in value, I still turned 10 into 50. 5x return. Not bad. Plus, I’ve been collecting 2% management fees the whole time. 🍹

So yeah: everyone wants a slice of this PE pie. But when capital floods a strategy, prices go up. And when prices go up… returns go down:

You can’t just slap a Private Equity sticker on a pool of capital and expect to recreate KKR’s returns from 2003. That’s not how any of this works.

Like: why didn’t OpenAI or SpaceX raise money on Seedrs/Republic Europe? Or any of those shiny retail-facing European venture platforms?

Because when those companies need cash, there’s literally a line out their door. You, the retail investor, aren’t even in the building. Before you see an opportunity, it’s been passed on by… a lot of people. A lot lot.

Same thing with public small cap value stocks. If they’re still listed? That means every major PE firm probably looked at them and said “nah.” Maybe not all the good deals are gone, but the pool is definitely smaller.

And here’s the kicker: adverse selection is worse in PE.
Why? Because you can only privatize a company once. You can have a dozen value ETFs owning the same stock. Partially the same with VCs in a startup round. But PE? It’s a one-seat-only kind of ride. And yeah, sure, sometimes firms team up, but now you’ve got three cooks in the kitchen trying to restructure a company. Not exactly efficient.

But again, the game is too profitable to stop. If you’re an asset manager and you step away? Someone else eats your lunch. So everyone keeps going. Even if the buffet is empty.

Meanwhile big allocators, pensions, endowments, insurance giants, used to have 0% in PE. Now? Some of them are at 50%. That’s… a lot of eggs in one golden basket. And even if they wanted to go all-in, they can’t. Because they have, I guess, someone in the investing committee who understands the goose can only lay so many eggs before it collapses from overexertion. A little diversification means more job security…for them.

But PE firms? Still hungry.
And they don’t care if the deals are actually profitable, because:

• If things go well: they get carry.
• If things go poorly: they still get fees.

So… who’s next in line?
Retail.
Cue the marketing machine.

“Look at past returns! Look how rich the rich guys got! And now: you can too. Come on board. It’s the democratization of finance. Don’t be left behind. Or poor.”
🤡

There’s even a fun little narrative that goes like: “If you want passive exposure to the global market portfolio, you need PE.”

Spoiler: that’s mostly nonsense.

Yes, big private companies exist. But they’re usually private for a reason: the owners don’t want to deal with public markets or nosy little shareholders. Like, IKEA is massive. But guess which PE fund isn’t getting shares in IKEA? Exactly.

Also, owning a slice of a PE fund doesn’t give you “beta” to the private equity sector. It gives you whatever alpha (or not) that fund can scrape together. If you want beta exposure, you’d need:

• Access to the biggest, top-tier managers (you don’t have it), and
• Diversification across tons of funds (you don’t have the capital).

Look at the dispersion of performance:

from here

People referring to PE performance as if it is buying SPY are either stupid or frauds.

Ask yourself: Who is the Private Equity manager showing up on your screen asking for your money?
Is it the legend who’s been hitting home runs for 20 years straight? Or is it… a random German neo-broker with a slick pitch deck and a dream?

Here’s a hint: the good managers don’t need you. They have institutions lining up.
You’re getting the people who need capital, not the ones who have it. This is like showing up to invest in RenTech, but only being allowed into the mutual funds. You know, the ones with the lousy returns.
You’re not getting Medallion. You’re getting the public-facing leftovers.

Back in 2015, Dan Rasmussen (from Verdad) and Brian Chingono published a paper that kind of wrecked the party.

They built a simple portfolio:

• Small-cap value stocks
• With high leverage
  Boom. Private Equity in a box.

And guess what? That portfolio matched PE fund performance, gross of fees. But if you subtract the fees PE funds actually charge (carry + management)? The public market strategy crushes them. Like, really embarrasses them:

Private Equity funds love to flex their high Sharpe ratios. “Look at us! Sharpe over 1! We’re so efficient!”

But let’s not get ahead of ourselves, because a lot of that risk-adjusted magic comes from something called volatility laundering. Translation: they smooth out the returns.
The standard deviation gets squished down, which makes the Sharpe ratio pop, even though the underlying risk hasn’t gone anywhere. It’s just hiding behind illiquidity and infrequent marks. It’s accounting smoke and mirrors.

Now enter: BlackRock.

They’re leading the charge to bring PE to the people. In Europe, their weapon of choice is Scalable Capital, a neo-broker-slash-platform-slash-distributor that now offers retail investors a slice of the private equity pie.

The timing is kind of ironic.

Right when Scalable launched its PE push, Avantis, one of the best small cap value managers out there, listed their ETF in Europe.

And that sparked a thought:

Yo @ScalableCapIT rifacciamo la scommessa di Buffett e Seides?
Tra 10 anni secondo me AVWS sta davanti al vostro fondo di PE

— Nicola Protasoni (@NProtasoni) June 11, 2025

Let’s take a trip down memory lane.

About 18 years ago, Ted Seides made a now-legendary bet with Warren Buffett: Hedge funds vs. the S&P 500. Ten years. Go.

Ted picked a portfolio of hedge funds. Buffett picked boring ol’ SPY. And the rest is… financial folklore.
Because SPY crushed it, years before the bet even ended.

And yeah, in hindsight, I probably could’ve upgraded my little tongue-in-cheek pitch to Scalable Capital by adding leverage. AVWS (Avantis) doesn’t exactly go dumpster-diving for high-debt companies, so it’s not an apples-to-apples PE mimic. But still, even without leverage, I liked my odds.

Why?
Because when you combine high fees + meh deal flow, you’re not exactly building an alpha machine.
You’re building a really expensive blender that makes lukewarm smoothies.

Then — plot twist.
I read this article.
Ted is BACK. Back again! 🎉

And this time, he’s betting on… North American buyouts. (Yes, the same PE segment that everyone is suddenly trying to “democratize.”)

But what really made me raise an eyebrow? His conclusion:

“Putting numbers to these concepts: assuming a 10 per cent return of the S&P 500 over 10 years, private equity would need to deliver approximately a 15 per cent gross return to beat the index. Higher leverage can make up 2-3 percentage points of that gap at current interest rates and spreads. However, the forty-year tailwind of declining interest rates will no longer support private market returns as it did in the past. Next, smaller companies can grow faster than larger ones, a factor that could benefit private markets over time. Over the last century, small-cap stocks in the US have outperformed large by approximately 1.5 per cent per year, although that premium has been slightly negative since the GFC. Adding up those two effects, private equity’s structural benefits could make up perhaps 80 per cent of the gap. The rest is up to allocators to select top private equity managers, private equity firms to make above-average investments, and management teams to deliver better operating results.“

Private Equity funds actually do have structural advantages. They use leverage. They focus on small caps. They can be hands-on. They get to tilt the board.

And still…the mountain to climb is so high.
Why?
Fees.
So. Many. Fees.

Even Ted Seides admits this. “To win with PE, it’s all about picking the top managers.” Like, elite elite. Like, “you’re not on the guest list” elite.

So then… how does that square with Scalable Capital’s pitch?

“Just pick our fund. You’ll be fine.”
💀

That’s not how this works. That’s not how any of this works.

Even worse? Scalable is showing the best historical results, the vintage years, the outlier returns, and implying you will get the same thing.

“But as I learned from betting with Warren, the future is much harder to predict than the past. When you add it up, I’d put the odds of private equity outperforming the S&P 500 net of fees at around 40 per cent, which says next to nothing about what investors will actually experience.“

Even Ted is not confident in HIS bet!

Now look, if Private Equity actually gave you diversification, I’d be chill about it underperforming.
Not every asset in your portfolio needs to be Usain Bolt. Sometimes you just want something that smooths the ride, lowers the bumps, gives you ballast. Totally fine.

But here’s the thing they don’t tell you: PE funds are stocks.
Just… less honest ones. They’re highly correlated with the broad equity markets: S&P 500, MSCI World, pick your index, it doesn’t matter.

But here’s the kicker: The marketing push to get PE into retail portfolios is massive.

Asset managers are treating this like a moon landing: “Everyone deserves a slice of the private equity dream!”
Except… it’s not a dream. It’s a product. With a story. And a sales quota.

And betting against that sales machine? That’s the worst bet you could make. They’ve already won. It’s going into portfolios, whether or not it belongs there.

And in 10 years, when the returns are “meh” and the fees are “yikes”? No one’s going to remember that podcast episode, or that LinkedIn post, or that influencer who told you, “This is the finance product the rich used to keep for themselves, and now it’s yours.”

You’ll just be stuck holding a fund that was never built for you in the first place.

What I am readin now:

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