Investing Billions - E196: Professor Steve Kaplan: Do Privates Really Outperform the S&P 500?

Episode Date: August 6, 2025

Why do Harvard and Yale seem to be exiting private equity? What does the most rigorous data actually say about buyout and venture performance? And how should serious LPs think about real estate, hedge funds, and co-investments? In this episode, I’m joined with Steven Neil Kaplan—Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business, co-creator of the Kaplan-Schoar PME metric, and one of the most widely cited academics in private equity and venture capital. Steve breaks down decades of private market performance data, busts myths around IRRs and overmarking, and gives a rare, honest evaluation of asset class performance through multiple cycles. This conversation is a masterclass in understanding what the real numbers say—direct from the person who helped shape how performance is measured.

Why is Yale and Harvard getting out of private equity? That's a good question. I am not entirely sure, but I think it's a combination of things. I think, first of all, they are, you know, Harvard and Yale both have some liquidity issues. They probably felt they were a little too illiquid. And so by selling some of their private equity portfolio, they get more liquidity. I would guess, too, they looked at their portfolio and they saw some funds that they were either not too happy with or were happy to get out of.

And third, I think the bid-ass spreads, I imagine in the secondary market were tight enough that selling, they were able to sell it at what they thought were reasonable values. So I'd say those are probably the three things that have led to the sales. If Yale gave you a call, let's say Matt Mendelsohn, the CIO gave you a call and said, how should I get liquidity in my portfolio? What would you advise? Well, I think allocates too much to hedge funds. Hedge fund performance has not been great over time relative to other things.

So first of all, I get to reduce my hedge fund exposure. I also would say the same thing about infrastructure and real estate. So I would take my allocations a little different from Yale in order to get some liquidity. And then I'd be go ahead. One of your research papers took a look at buyout, private equity returns between 2000, 2017. It found that on average, buyout outperformed by 4% versus. is S&P 500. Tell me about that research, and how did you go about ascertaining that performance?

This is all ongoing, and I'm going to give you the most up-to-date numbers in a second. But the research started many, many years ago. No one really knew anything about private equity performance. And Antoinette and Shore, who is at MIT, and I wrote one of the first papers looking at private equity performance. It was 2005, and we used data from venture economics, and we came up with a measure that is called the Kaplan Shore public market equivalent that allows you to compare apples to apples, private equity, whether it's biotin venture, with whatever index you choose, we chose the S&P 500. It turned out the venture economics data were bad, and I'm going to come back to that later when we talk

about Luda. Since then, I've been using the Burgess, now MSCI data, which are the absolute best data on private equity performance. They're much better now. Burgess gets their data from limited partners, usually institutional, so it's pension funds, sovereign wealth funds, endowments. And because those data sources are LPs, there's not a selection. collection bias. They're getting the data from the buyout firms, the venture funds, whatever it is, and Burgess takes the data and then we have access to it. So this is now very, you know, it's data that are as clean as you can get. They're still, you know, not perfect because you don't know everything that's out there. But this is the best data there is. And so the most recent data, if you look at buyout funds in North America, from 2000 to 2019 vintages, and those are good vintages because, you know, the data are through the Q1 of 2025, so the 2019 funds are at least five years old. And if you look at how those funds have done as of today, and the more recent funds, there's still some, you know, they're not

fully realized. It could move a little bit because of, you know, net asset values. But they are currently running at 360 basis points above the S&P 500 over that period. And or everything raised 2000 to 2019 as a 225 is 360 basis points over the S&P 500, which is, is, you know, spectacular. And it's why so much money went into private equity. If you then, you know, compare it to the Russell, 2,000. which is maybe a better benchmark for private act for buyout funds because they're not you know they're not buying big companies they're buying mid cap it's 460 basis points so the performance has been very good private markets because there's lack of standardization and there's all sorts

of biases you mentioned one of these biases LP derived data from GP derived data there's also all sorts of marketing biases, standardization biases. It's actually incredibly valuable to have standardized data. So you created this Kaplan Shore index. Tell me about what that index is and how did you normalize data from private equity to the There are two ways to look at it. One is sort cumulatively, which would be sort of like a market adjusted multiple of the fund. So what it basically does is says,

okay, if the private equity fund calls capital, let's say it calls $100 million, we put $100 million into the S&P 500 that day. And then over the life of the fund, when the fund, when that money comes back, let's say we got a $300 million realization five years later, we compare that 300 million to what you would have returned if you put the 100 million in the S&P 500. So if the S&P 500 went from 100 to 200 over that period and you got 300, that's a PME of 1.5. You have beaten the S&P 500 by 50%. The S&P 500 went to 400. Well, now it's 300 divided by 400. your PME is 0.75, you have underperformed the S&P 500 by 25%. So the public market equivalent is basically saying apples to apples,

you put your money in the S&P 500, you put it into the private equity. If it's greater than one, you've done better than the S&P 500. And that number for private equity for those vintages I mentioned is 1.13. So it's 13% cumulatively better than the S&P 500, and the S&P 500 went up quite a bit over this period. You can then annualize it to something called a direct alpha, where you're basically taking that 13% over the life of the fund and doing an IRR on the excess, and that's the 360 basis points that I mentioned earlier. Something like 15% versus 11% would be a back of the envelope guess on that. When you look at the data 2000 to 2019, how much roughly is the S&P growing on a yearly basis versus buyout over 19 years? So I would say it's sort of 15 versus 11.

So you would have done, and that's about the 400 basis points that I mentioned. So using the rule of 72, it's roughly doubling every five years for. versus doubling every six and a half years, which doesn't sound like a big difference, but it certainly compounds dramatically. It certainly compounds. 360 basis points a year is a big difference. Out of curiosity, do you also add dividends

into the S&P 500 as well? Yeah, so the S&P 500, you absolutely have to do that. So the S&P 500, it includes dividends, which are roughly 2% a year. And the buyout fund performance, include all distributions. So it's really, it's an apples to apples comparison, which is why it's, and it's very simple, you know, to calculate actually, which is why it's such a nice, you know,

we thought it was a nice metric to use. One of your colleagues at Oxford, Ludo Filippo is this private equity critic, just stating his bias, and he believes that a lot of these metrics are gamed, IRs can't be eaten, and there's a lot of gamification from, the private equity industry. Why is he wrong? He's wrong in that he's actually misleading on a number of things, and he's wrong on a number of things. And he's actually been wrong for quite some time. I'll say something nice about him later, that there's some things that he's right about. So these numbers that I gave you are based on cash flows. So these are not, these are not IRRs. These are not things you can't eat. These are based on cash flows with the exception

of the unrealized investments that are still in the funds. 2017, 2018, 2019 vintages, those aren't fully realized. So the numbers I gave you could move a little bit because we're basing the what's left in the portfolio on the marks. But everything else is realized. I mean, this is 2000 to 2015, these things are very realized. And those are the numbers. And those have been the numbers. So to say, somebody would say there's volatility, you know, people playing games with volatility, playing games with IRR. Those numbers I gave you, those are quite real. So that's number one. To say they're not real is wrong. And Ludo doesn't say that. The second thing that he's done on a number of occasions is not done in apples to oranges calculation. So what he'll do

in a lot of these things is he'll put private credit, he'll put real assets, in with the buyout and the venture, and then he'll compare them to the S&P 500. Well, buyout and venture absolutely compare to the S&P 500. Private credit? Are you kidding? That shouldn't have an S&P 500 type return. And then real assets and real estate and infrastructure, I think you can debate. But if you take out the private credit, the real assets, the infrastructure, these results are super strong through the 2019 vintages. So he sometimes mixes apples to oranges.

And in several of his things, he used the lease. favorable time periods to private equity. And, but if you use this long period, 2000 to 2019, what I just told you is what you get. So there's, there's just no way to say buyout performance hasn't been very good through those vintages. Now where he may turn out to be right, which is, you know, we'll see are the more recent vintages. So 2020 to 2020 vintages, which invested a lot of.

money and the craziness around the pandemic, where prices got very high, those vintages right now have PMEs of about 0.98 and the direct alpha of minus 1% versus the S&P. So they're coming in S&P like at the moment, and they could end up lower. What's interesting is they're still beating the Russell. So the Russell, they're beating the Russell by, like, the PME is 1.22. That means cumulatively 22% better and an 8% annualized outperformance. So if you think the Russell is the right benchmark, you know, those vintages are going to be okay. If you think it's the S&P 500, maybe maybe not. So maybe Ludo will be right. But what I'm doing and have done consistently is apples to apples, look at, you know, the time periods, be very clear about what you're looking at.

And, you know, that's what I've done. The other place where I think he's, again, I think I agree is real estate and real assets have not performed so well. And on an absolute basis and relative to the S&P and infrastructure probably not as well. If I were advising an endowment, I would steer clear or not do very much of infrastructure or real estate. And I would stick to what I think is real private equity. And you advise that because real estate has worse performing returns. So even if it adds some more diversification, real estate and infrastructure on an expected value, you're actually lowering your returns?

What about diversification? The diversification is the infrastructure, I think, is the jury is out. The returns have been low. If you look at it relative to the S&P, the returns have been low. If you look at it relative to some infrastructure index in public companies, it looks better. And so you kind of have to decide what you're doing with infrastructure. Are you looking for a return or you're looking for, diversification. The real estate even sort of underperforms the, you know, the public real estate

indexes. So the real estate has really not been a great place in private equity. I also, the other thing I think about is you're paying these fees, which are, you know, not trivial, you know, whether it's two and 20 or, you know, one in 10 depending on the asset class. And you're paying those fees because the P.E. firms are adding value. And so where are they going to add value? You know, on the buyout side, you know, they're they're doing it right. And a lot of these companies, the private equity funds try to do it right. They're adding real operational value to these companies. Infrastructure, I think it's a little harder, but you might be able to. Real estate, what are you doing, right? You're buying low, selling high. I'm not sure how you add value to

a building over, over somebody else. So I think the value added is potentially much higher on the buyout and venture capital side. So there's, you know, some hope or expectation that they'll earn their fees. I think it's harder in some of the other asset class. When the Kaplan Shore Index is comparing buyout to S&P 500, you're doing on a net basis. So what the LP would get, not what the private equity funds. Absolutely. Yeah, and that's very important. It is net of fees on the private equity side.

And on the S&P side, actually, we use the S&P. So if you think there's a little bit of fee or a little bit of friction, we're kind of biased against the private equity by just dues in the S&P 500, although you can, you know, you buy an ETF, the fees are very low. I'm not some kind of private equity or venture apologists. I try to look at the market, although I have advice. I do think it performs better. It's good to see that the data shows that. But it seems to be the wrong way just because SMP has had a five-year run, which if you

really double-click on that, that's the Magnificent Seven, you know, the Tesla, Microsoft, Apple, meta. And maybe now they're slightly overperforming by 2%. It doesn't mean that it was a better decision at the time of investment. How far back does this data go? And how conclusive is it over a multi-decade timeline? You're absolutely right. And that's why the Russell is interesting, right?

Because the S&P has crushed the Russell. And going back to Falapoo and what, you know, also some other people say about private equity, they used to say in, you know, 2005, 2000. 2010, oh, buyout investing, that's small cap value. If I just, you know, leverage small cap value in the public markets, I'd outperform. Well, small cap value has been terrible the last 15 years and it's been crushed by the Russell. Russell's small cap value has been worse than Russell, which has been worse than S&P 500. So you kind of have to think about what the right comparison is. And then I think, I think, you are getting diversification, which I think is your point, that when you invest over the long haul, there are going to be some periods where one asset class outperforms the other. And as long as they don't move exactly together, you should get, let's say they have the same return, not a better return, but they're moving differently by investing in more than one asset

class. You're getting the same return with less risk. And so that's where certainly if you you know, put a lot of money into buyout funds 2000 to 2019, you way outperformed, even though over the entire period, even though you didn't now perform over every individual period, which goes to your next question going forward, what makes sense? That's where it's really, it's super hard because it's a lot easier to look backward than it is to predict the future. You have to come to some, I guess, expectation. What is this asset class going to do in terms of return relative to, say, the S&P 500?

Is it uncorrelated or not perfectly correlated? And then the right answer is, if you think these asset classes have similar returns or private equity might be slightly higher, then you allocate to each of the asset classes, which is diversification. How much is S&P correlated with buyout? This is sort of the shocker, or it's surprising, is they're not perfectly correlated.

So you definitely get diversification benefit from holding buyout and the S&P. 500. You know, and you can see that from what I just showed you. Buyout outperform, you know, those vintages through 2019. And buyout is underperformed probably 2020 to 2021. So they're not moving in lockstep. So, and the returns have been higher on the buyout. So you get, you get some higher returns and you get diversification benefit. The other question people ask, which is, I think, you know, is, is buy out just a leveraged, you know, investment in the S&P 500? And if it were a leveraged investment in the S&P 500, you would see two things.

Number one, you would see them move in lockstep, which you haven't seen them do. I just told you they didn't move in lockstep. You would also see a beta well above one. And what a beta is is how the returns on a private equity fund move with the returns on the S&P 500. So if they were, you were just, the buyout fund was just like the S&P 500, the beta would be one. if it were a leveraged investment in the S&P 500, and we think buyout firms probably have 50, 60 percent leverage, public companies, 10, 20 percent. So that'd be like a 40 percent difference. You'd see a beta of 1.4 or 1.5. And you actually see betas of one. when you estimate based on, and this is based on cash flows, not marks. So they have kind of the same risk as the S&P 500.

They don't move like the S&P 500, and that gives you diversification benefit. To double click for the audience, one of the most important things about Burgess and LP-driven data. One is it's driven by LP, so there's no survivorship bias. and there's no GPs only sending data in when it's positive. The second one is this aspect of DPI. DPI is ground truth. You could hem and ha for 20 years say, I'm good, I'm bad. You could understate, overstate.

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They want to raise capital. On the undermarking, it's just the rule of conservatism. You don't want a Yale endowment that gets a 1.75x mark, and the next quarter is 1.7x. It just doesn't make you look good. So a lot of established managers don't like that. But I want to go into the data, not in terms of narratives or, you know, your personal views, what does the data say when it comes to whether private equity buyout and or venture managers undermark or overmark as a general rule? And also in which cases

does the data show that one or the other happens? I've written two papers on this at least. So number one, historically, and this is before, you know, the 2021 period where they, they, you know, went, you know, into deals at high valuations. Historically, on average, they undermarked a little bit. So this is your point that they want to be a little conservative, right? And then the times when you do see them being a little more aggressive is when, as you said, when people are fundraising.

And there are two things that go on when people fundraise. people tend to fundraise when they're top quartile. So when do you fundraise? You have a great realization. Something good happens. That's when you go. And if your fund is not doing well, you don't fundraise. You wait until it is doing well.

So it's pretty amazing when you look at who raises funds. There are like very few bottom quartile or even third quartile funds. it's mainly top quartile and second quartile. And what that means is, you know, when you fundraise and you compare yourself to other funds that were raised at the same time as your previous fund, you know, you're ranked in quartiles by the Burgesses, the pitch books, the Cambridges, and people go when they look good relative to their, you know, comparison set. So people tend to go when they've had good performance, and then the poor performers tend to write their assets up a little bit around fundraising. And people are aware of this. I mean, if you're an LP, you understand, and you should be looking at the unrealized investments in the previous fund to see the extent to which they're doing that. And I think LPs understand that.

So the first two questions you said, what is the, you know, what do people do? They basically, as you said, the Marx historically are a little conservative. They get less conservative when people are fundraising. And that's the, you know, what you see at the fund level. The people now saying that the marks, everything is. overmarked, it probably comes from, you know, that 2021 period where they made a lot of investments at high valuations and they haven't fully written them down. So we'll see what happens going forward, how much of that turns out to be overmarked.

And I think it's too early to tell, obviously, on the research, because you've got to wait and see what valuations, those investments get sold at. A very famous manager, I no longer repeat his name because it's not the best quote attributed to him, but says that as a management is about having average return and great customer service. Now, clearly it seems like it's people don't fundraise when they're in third and fourth portal, but to what extent is that true that if you have median returns and just great customer service and great LP management and maybe great transparency, whatever else you would group in that bucket, to what to what extent do you see? funds that are able to do that, continue to survive and thrive. So I won't name names because I, well, I could, but I won't at least initially, is if you look at the performance of the mega funds that were raised post-great financial crisis, vintages 2009 to 2019, and look at megafunds, and look at mega-funds.

which were more than $10 billion. Those funds, actually, their PMEs are lower than the average buyout PME. And I think, you know, some of them have performed S&P-like. And, you know, as a role, they're a little overall, they're a little bit over the S&P. Some of them are S&P-like. And they still raise a lot of money. So the mega funds, I think, are as a class in that bucket where their performance post-GFC has not been as good as the middle market folks, but they've continued to raise a lot of money, and they've delivered, you know, okay, overall, somewhat better performance than the S&P 500, but not as good as some of the others, but they've delivered, you know, okay, overall, somewhat better performance than the S&P 500, but not as good as some of the others. but they probably give good customer service.

They also allow you to write big checks. So there's an economy of scale. And again, we'll see whether that continues over time. As people say, gee, the returns here are less than the returns at some of my alternatives. You're a great researcher and you don't like to speak off the cuff. But if I forced you to guess why LPs continue to invest into these funds, what would be the one or two factors that you think is driving LPs to invest in these mega funds that are underperforming S&P 500?

I'm going to give a positive caveat to that. Even though the fund, let's say the fund is S&P 500, they also get co-invest rights in a number of these funds, the larger investors. And on the co-invest, they're not paying fees. So the blended, you know, S&P 500 on the fund and better than S&P 500 on the co-invest, they're beating the S&P 500. So I think I'll pull that back a little bit that the larger investors will beat the S&P 500 less than they would have on sort of the smaller mid-market buyout funds. And I think that's probably the explanation if you're a large investor, you know, big pension fund, big sovereign wealth fund, who do the co-invest, they're going into

the mega funds because that's where they can put the money to work. That's not an irrational thing for the large investors. For somebody, I think for an endowment that's, you know, a $10 billion dollar endowment, then maybe you want to go somewhere else for the, you know, if you're a hundred billion trillion dollar investor, then it makes perfect sense. Is there a back of the napkin way to convert a two and 20 into a percentage, a annualized percentage? Yes, there is. You have to tell me what the gross return is to turn it into net, because that as the gross

return gets bigger, the spread gets bigger. So take a 25% gross, which would be a very nice fund, right? 25% gross is, you know, more or less 3x gross. The 3x gross, the 3x gross, 25% gross turns into like 19 net. So that'd be a... About a 6% annualized fee. So So said another way, if the fund is doing a 19% and you are accessing co-invest, let's say that you weren't adversely selected, you would be getting another 6%. Correct. So if you were going apples to apples to S&P 500, and you were even now with the co-invest, you're 6%.

And maybe if that's half of it, you're 3% if you have 1%. Correct. Correct. And I think people say it's like co-invest like a quarter to 30%. So you take 30% of the 6% be 1.8%. that would be sort of industry-wide. So one of these memes in the market is large buyout because there's no, the leverage is not as attractive.

Maybe there's the same access to leverage, but the interest rates are higher, is almost inferior to S&B 500. Small buyout, there's still like this operational value ad that you could do and you could have multiple expansion, all these things. I'm asking you to project into the future, which is not something you typically do,

but to what extent do you believe in that meme? And what are your thoughts on this? You've got mega, you got middle market, you have lower middle market on the buyout side. All of them, I think, have invested heavily in trying to add value to their companies. And I think that's the big change over, you know, when I started. So I started teaching private equity in 1996. And I would, would regularly have people in class, or I'd have, have GPs in class. And I would, I had a framework as to, you know,

how I evaluate deals. And one of the pieces of the framework is, um, how do you improve the business? And then another piece of the framework is, is what's, your edge or what's proprietary about you doing the deal rather than somebody else. And it was, I always, it was sort of bizarre. I like would ask, ask them that. And then half the time, they would say, well, what are you talking about? I don't do that about thinking about why, what's my edge or why am I doing the deal. And I thought, gee, that's kind of weird.

I would have thought of it. That's the first thing. Now I ask that question. It's the first thing they think about. So the world usually changed that in 2000, that was a huge advantage if you did that. And I have several former students who did that and have very successful private equity funds. And now it's table stakes. So everybody's doing it. So the world is more competitive across all the asset classes. But they're all doing. it. So the good news is when they buy a company, they're buying it with an idea, here's how I'm going to make it better. Now, the question is, can you make money doing that because you're competing? And so you're competing against other funds who are doing this. So that makes it harder to have excess return. So now let's look at the different parts of the market. The mega funds, the hardest part for them these days is exiting because they have, number one,

it's hard to, if you've done a mega deal, it's hard to sell it to another private equity firm because the deal is too big. Strategics are tricky for antitrust reasons. So even though the administration has changed, it's not clear that antitrust is going to be a lot less tough it'll be less tough but but there's still you know antitrust risk you can go public but going public is is harder these days because there are fewer IPOs for whatever reason and then once you do go public it takes a long time to distribute because you're you know if you own 70 80 percent of the company it's it's hard to get all that out and so And then you've got continuation vehicles, which they're here because of the difficulties in exiting.

But it's still, for the mega funds, it's still their very, very big checks. So the mega funds, their real challenge is going to be figuring out how to exit deals at decent valuation. So I'm like, I'm a little nervous about the mega funds for that reason. The middle market, I think, is better because they can sell in. They can sell to other private equity. they can sell more easily into the continuation vehicles, the strategics, probably less antitrust, and IPO probably less traditional.

And then the lower middle market, I think, is still the most attractive because there's a little less competition for deals. I think you can do more with the companies, and it's a lot easier to exit. The problem with lower middle market, it's hard to put a huge money to work because the funds are half a billion

as opposed to $5 billion. So that's how I view looking forward. I would say that the other thing that's positive about buyout is that the buyout funds, the GPs are still underwriting to 20, 25% IRAs, to 2.5, 3 times gross. And so even if they don't, you know, they do the deal, they don't hit that number, the returns are still likely to be okay. So I like the risk return on bio in general and skewed a little bit toward, you know,

away from the megas. You've been teaching private equity since 1996. You've had students and you're like, oh, I think he's going to be very successful and he was not successful. Maybe she was not supposed to be very successful. She was successful. So what characteristics do you find that in retrospect, what are some of the patterns that you find in retrospect among your students that are predictive of them being successful in private equity? How you do in my course is a very good predictor.

And the reason, and I can tell you the people who have been very successful private equity investors, not exclusively, but with a high correlation. did well in my course. And I'll tell you why. Number one, you know, my course, it's a case course, you know, venture capital and buyout. And half your grade is class participation, half your grade is a final. So to do well on the final,

there are really two pieces of the final usually. There's like an analytical numbers part. And then there's a big picture, Like, do you get the economics, the big picture? To do really well on the final, you've got to see the big picture and you have to be able to do the numbers. Well, those are pretty important to being a good investor, right? Got to get the numbers right, but you got to see the big picture. Then on the class participation, to do well there, you have to have a couple of things.

First, you have to be aggressive. So you have to raise your hand and get out there. Second of all, you have to be articulate and be able to explain what you're thinking. And I think that is also very useful for private equity because you've got to be able to explain what you're doing to management teams and to LPs. So if you have, you know, those characteristics, you're aggressive, you're articulate, you can do the numbers and see the big picture, those are four pretty good characteristics. When we last chatted, you mentioned that when people are scared to invest in private equity, it's the best time to invest outside of the obvious supply and demand dynamics. Tell me how that's actually plays out in the market. I'm going to caveat this that it's hard to know when you're exactly at a peak.

And I wrote a paper on this saying that at the time you can't always tell. But when you are at a period like 2000 in venture, the amount of money in venture was crazy, that was not a good time to invest in venture. the vintages in buyout that have been sort of the mediocre performers 0607-08 those vintages are you know S&P like slightly better that's when a lot of money was going in and 2020-21 as well a lot of money went in it was you know a big pickup and those vintages you know as we saw are not looking so great And then, you know, on the venture side, you had people in 2009, you know, saying the venture capital was dead. It's never going to go anywhere.

And, you know, those vintages were awesome, you know, 09 to 2013 or 14 on venture. And, you know, buyout people thought it was dead in 2002 to 2004. They thought it was dead in, you know, 2010 to 20. 14. So you have these periods where a lot of money is going in. And particularly after a couple of years when a lot of money has gone in, those are vintages that are historically not good. And then on the flip side, vintages where there's not a lot of money going in have turned out to be good vintages. And as it, you know, that looks to me like supplying. demand. And again, it's not perfect because venture, like in 97, 98, was higher than it was in the previous years. And so those vintages actually turned out to be very good. But then the next couple of years was an amazing amount of money. Those were the bad vintages. So it's not, it's not perfect because you can't always tell exactly where you are on the curve. And we're, by the

way at a period where, you know, the buyout is actually down a little bit relative to the last few years. And ventures down a little bit too. So, you know, to your point, I think earlier, you know, you had the 2021 stuff that was very, people did deals they shouldn't have done. There's this indigestion period. We're kind of at a period where people are being mixed or a little negative. And that may continue if the marks that we see, if, you know, when they start selling, those valuations come down a little bit. So it'll be very interesting to see whether that's predictive or not. It's easy to see when something's overheated and goes down because you see the withdrawal. It's harder to predict when something's at the top until after, because

sometimes there's this bull run but to your point if something keeps on compounding by let's say a tam of 20 30% for many years you could predict that maybe it won't go down next year it'll go down in the next couple of years although that's also difficult because venture had this bull run from 2008 to 2021 essentially if it were easy if it were easy you know I'd be running a hedge fund what I would do you know in in this is rather than then then ride up and down, just sort of keep your allocations constant over time. I mean, that's the, that's the way to sort of, you'll put a little bit more to work in the, um, in the bad year, in the low years, you put a little bit less to work in the overheated years.

The analogy is if you want to be top desal, you pick the, the bull in the bear markets, which you could argue it's possible or not possible, probably closer to impossible. But if you want to be top quartile, you just stay in the market. You just keep on investing, and that's the investors that's done really well. One of the most absurd ideas to me on this private equity or venture capital is there seems to be this assumption that you have to invest in a certain valuation. So if I'm investing in venture seat, it has to be at $20 million versus this much more real dynamic, which is supply and demand.

So if venture is very unfavorable, you're investing at a lower valuation. So clearly at some valuation, it makes sense to invest in venture. So it's not a question of whether it's good to invest in venture or not. It's whether there's more good opportunities in capital that is chasing it at the time. In other words, it's not whether it's a good year, bad year to start a tech company. It's whether other people believe that and kind of the game theory between other investors in the market. Look, if you invest in the same deal at a $5 million valuation versus $50, your returns are going to be a lot different. I can't let you go without asking you about to normalize the data for venture against S&P 500 over the last several decades based on LP data, not based on GP data.

I didn't say something earlier that's well worth saying. There's some new research that uses data from Adipar. And Atapar basically is a platform for family offices and wealthy individuals who invest in a lot of funds. And what the Atapar data show is almost identical to the Burgess data. So the good news on that, there's two pieces of good news on that for the people listening is, number one, the Burgess data seem right. At a par, it's a different sample, it's family offices, wealthy individuals. The returns that I just told you and will tell you are basically the same. same in Adapar and Burgess. That's one. Two, it seems like the family offices and wealthy

individuals are getting into the same types of funds. So you're not adversely selected versus the institutions what the family offices and wealthy individuals get into. So if you're going to do this, that's good news. Venture is much more variable than the buyouts. So Venture has had periods where it's well outperformed the S&P 500 and it's had periods where it hasn't. And so if you look at, for example, 2009 to 2017 vintages, Venture did, you know, spectacularly, the average PME is like 1.017 vintages, Venture did, you know, spectacularly, the average PME is like 1.25, 1.3 versus the 1.15 or so for buyout. On the other hand, 2020 to 22 vintages, they're underperforming the S&P 500 by quite a bit. PMEs are about 0.8 or 20% worse than the S&P 500.

And of course, you had the mid to late 90s. The venture was amazing because of the dot-com boom. And then you had 99 to 2006 where performance was terrible because of the dot-com bust. So venture is much more variable by vintage year than buyout's been. Buyout's been very consistent. it's still over time beaten the S&P 500, but a lot more variation. And then the other thing that's a, that's a question mark with venture, at least among the academics, is that the beta of venture funds is a good deal greater than one.

So you have to decide if you're an investor, you know, do care? Like some people will say if you think that the beta is a lot of, bigger than one and then you compare that that return to venture then the the the the PME adjusted for the beta actually doesn't look so good on the other hand if you're just if you say okay i i'm just comparing it to the S&P 500 that's my benchmark then it looks good so i think that's a venture is a a trickier asset class in that regard than buyout, I would add, funny enough, venture I think does give you some diversification benefit because it performs well at different periods.

Like I just said, Venture didn't perform very well 20, 20 to 25. The S&P went up. And so Venture has, you know, does perform differently from the S&P 5. And that's, that's the entire venture asset class. that is the mean return for venture that's mean and so you also have to be careful on venture in that mean um is not median and so their median is lower so there's a skew and buy out the mean and median are pretty close so when buy out it's sort of you that the outliers um you know it's more of a normal distribution let's say venture they're you know this is the getting

into the top funds matters and getting the top funds are more predictable in venture buyout it's very hard to predict who's going to be the top fund in any vintage year venture it's you know the the founders funds the sequoias the benchmarks have been consistent and so venture you know you have to make sure you're getting access now that's the bad news The good news is the add-upar data, the returns are similar, which suggests that people do get into some of the good funds. There's like a 52% persistence in venture. I believe that's a University of Chicago study, actually. Well, it would have been my study.

So to quote you back to yourself, 52% of funds raised post-2000 had above median performance, some persistence. 32% at top quartile performance. So 32% persistence, 52% outperformance post-2015. Well, Steve, there's a lot more to unpack, but we'll have to leave it to another podcast. I appreciate you jumping on and sharing your wisdom. Great. It was a pleasure.

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