A reader hit me up last week about something that triggered my BS detector: MSCI built a “Private Equity replicator” index, and Goldman Sachs wrapped it in an ETF, ticker GTPE.
Here we go again, I thought. Another product to “democratize private equity” for the masses. Another way to collect fees on the promise of replicating something that can’t be replicated. Or better, shouldn’t be replicated. I’ve seen this movie before, and it usually ends with disappointing returns and a lot of explaining to do.
But then I caught myself. Because I’m actually invested in other replicators, the trend-following stuff from the Return Stacked guys, DBMF, and I also follow closely Unlimited ETFs. So who am I to dismiss this out of hand without at least kicking the tyres?
The Premise Isn’t Crazy
Here’s MSCI’s pitch, and honestly, it’s more thoughtful than I expected:
“While some of private equity’s historical performance advantage has been attributed to the skill of general partners in sourcing, selecting and operating portfolio companies, another portion can be linked to more measurable exposures such as sector allocation, regional focus and factor characteristics like size, value or leverage. These systematic elements can be approximated using liquid listed equities.”
Translation: not all of PE’s outperformance might come from David Rubenstein making brilliant phone calls. Some of it can be just math. Smaller companies. Levered balance sheets. Value characteristics. Sector tilts. If you’ve got enough data, maybe you can strip out the genius and bottle what’s left.
And look, this isn’t some wild new concept. People have literally done this with Warren Buffett.
The Buffett Template
Remember that famous AQR paper “Buffett’s Alpha”? Frazzini, Kabiller, and Pedersen took Berkshire Hathaway’s returns apart like a mechanic under the hood of a vintage Ferrari. What they found:
- Buffett’s Sharpe ratio was significant compared to the market (but also, at 0.79, nothing spectacular)
- A huge chunk of his performance comes from systematic factor exposures: value stocks, quality companies with stable earnings, low-beta names
- He uses leverage brilliantly through insurance float
- Even after accounting for all these factors, there’s some alpha left over…and that part is pure skill
The conclusion is that you can replicate some of Buffett. Not all of him, not the part where he gets the phone call about See’s Candies or negotiates the BNSF deal. But the general approach? The patterns? Those can be systematized.
Private equity is the same deal. Sure, you can’t replicate Apollo’s ability to get first look at Club Med or KKR’s operating playbook for portfolio companies. That’s the idiosyncratic stuff, the edge that only comes from relationships, timing, and being smart.
But if PE firms consistently tilt toward certain sectors, lever up in predictable ways, and focus on smaller, cheaper companies with specific characteristics, well… that might be a signal. And signals can be captured.
So What’s the Catch?
This is from Frazzini&gang paper: “We emphasize again that being able to explain Buffett’s returns using factors from academic papers written decades after Buffett put them into practice does not make Buffett’s success any less impressive.“
Here’s the thing that puzzles me about all of this: once you publish the “Buffett factors,” do they still work?
This is the central paradox of factor investing. Value worked great for decades…until everyone knew about it? Suddenly, being a value investor seems to mean buying the same crowded trades as every other value investor, and the premium might get arbitraged away.
The question isn’t whether PE has systematic components, it obviously does. The question is whether those components provide a durable edge or whether they’re already arbitraged away by the time you package them into an ETF (or they were not there in the first place).
This is exactly what is happening with Unlimited Funds’ ETFs. Smart people. Sound methodology. Mediocre results (so far).
The Model
MSCI claims they’re blending top-down and bottom-up models to avoid the weaknesses of each approach. That’s the same framework the Return Stacked guys use for trend-following. It’s rigorous. It’s research-backed. But rigorous doesn’t always mean profitable.
The model, as I understand it, doesn’t actually look at public stock market performance to build its replication. But did MSCI try fifty different models until they found one that happened to beat the World IMI but still land below the PE Index? Because that’s the cynic’s read: backtest until you get the result that makes for a good sales pitch.
Or, and this is the more interesting possibility, maybe the PE Index actually provides a decent factor timing model. Country tilts. Sector rotations. A long/short factor sleeve.
And get this: no leverage (!!). The whole outperformance comes from being smart about where you’re positioned and when.
If that’s real, if that actually works going forward, then this isn’t just a PE replicator. It’s a more capital-efficient way to allocate to stocks in general and factors in particular. That would be genuinely useful.
The Real Test
If private equity’s outperformance was only driven by manager skill, survivorship bias, and luck, then this whole exercise is pointless. You’re trying to replicate something that was never replicable in the first place.
But if there’s a systematic component, if PE managers are following a process that can be identified and extracted, then yeah, this could work as a liquid, transparent, cheaper way to get that exposure.
MSCI has the data. They’ve got decades of PE fund performance and deal-level fundamentals. If anyone can pull this off, they’ve got the raw materials. The question is whether the finished product actually delivers.
The fact that they can produce that backtest with a beta slightly below 1 makes me really suspicious about the whole cake but who knows…at least GS is charging only 50bps for the ETF, might be the best bargain since uncle Warren took over Berkshire 😉
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