[YPCrumble]

It feels like most answers to “who is at the losing end of any transaction” is pension funds, which are guaranteed by the government. So by your theory PE firms are sucking in taxpayer money by fleecing pension funds run by financiers who aren’t smart enough to get into PE.

Basically until pension funds aren’t bailed out by the government this will continue.

[alephnerd]

I'm adjacent to the space and I'd disagree with this statement: "fleecing pension funds run by financiers who aren’t smart enough to get into PE."

Institutional Investment Funds (pensions, endowments, sovereign funds, etc) need returns well beyond inflation to ensure long term stability.

To do this, they will mix and match various different investment vehicles to minimize risk.

This means a fund will have a varying percentage of funds invested in stocks+ETFs, commodities+futures, cash in hand, real estate assets, IP assets, and greenfield opportunities.

Essentially, you are dealing with dozens of different financial instruments, and while you may have an above average understanding of how all these work, you won't have the resources, staffing, or ability to optimize returns on all these instruments.

This is why Funds end up having VC firms make VC investment decisions, PE firms (itself a loaded term because PEs specialize in different markets and sectors) making equity investment decisions, etc.

If you are able to specialize in one specific sector (aka have both the domain experience and the network of founders, operators, and managers) then at that point you may as well open your own firm and manage investments on the behalf of other institutional investors.

It's all about specialization.

Also, fund operating costs cannot exceed more that 2%. This means you can only really charge AT MOST 2% YoY on the entire value of the fund. That 2% will have to cover your entire expenses (salary, insurance, office space). This means most operations have to be extremely lean as there isn't much money to spread around.

[civilized]

And what do they accomplish with all that complexity and the absurdly large up-to-2% expense ratio? Any evidence that these funds deliver better than index returns after fees? Or is it just a jobs program for the spreadsheet set?

[fakedang]

Some of the sovereign wealth funds like the Norwegian one and the Middle Eastern ones aim for a 10% annual return. They are extremely stringent about which funds they invest with, and in most cases they go for direct investments rather than passive ones. The funds from those are literally used to fund various welfare programmes for their citizens. They also hire some of the brightest, most talented traders and not some PE-rejects.

Just sucks that Western pension funds hire mostly second-tier folks with the right connections, with a few exceptions here and there, or some stupid union bosses, at least from my experience in PE.

[bko]

Pension funds are investors in PE, they're not the debtors. In other words, if PE firms do well, their investors (pension funds) do well. They're also not stupid

This whole conversation about PE is non-sensical. It's all based on this naive notion that PE firms borrow money to buy investments and use that money to pay themselves, more often than not bankrupting the original company, and since it was borrowed money, they can come out unscathed.

But no one can answer, why would anyone lend PE firms money if it's a bad investment? Debt normally doesn't have an upside. Best case scenario is you get paid back what you're owed plus interest.

A lot of online criticism can't even get the relevant players right and relies on naive tropes like "they're greedy" or "corruption", as a hand-wavy way to explain complicated dynamics. And then they throw out theories that could be dispelled by reading the first few paragraphs on investopedia regarding PE firms. Why is the discourse in this particular field so poor on hacker news? Low quality conversations regarding technical topics would not fly on this forum. If someone mentioned Y2K and you made a low quality comment like "greedy corporations wanted to save money by not storing more than 2 digits for the year", you would get downvoted to hell. So why does this topic have such poor comments?

[Spooky23]

> But no one can answer, why would anyone lend PE firms money if it's a bad investment?

Remember the housing crisis? As long as you can align the debt with an appropriate tranche, institutional investors like diversification and risk (in that part of the portfolio).

Also, these types of debt can make money in the short term. My father in law bought a beach house with a KMart bond trade. After they emerged from bankruptcy, everything was great! (Lol)

[fairity]

> So why does this topic have such poor comments?

I’m sure this won’t be a popular opinion, but I believe it’s basically class warfare at work. You have, here, a lot of upper middle class engineers whose egos are protected if they believe that the richer class is greedy and unethical.

[coastermug]

I believe this to be the case also. In the UK we have lots of cases cropping up of PE being the bad guys, but the current owners being to blame for buying these companies in unstable positions and allowing the sellers to make fortunes. It does often seem like it is Pension funds making these poor investments. I am also really happy to see this line of questioning on HN, as it has been lacking in previous discussions.

[horsawlarway]

You don't stop making blood to get rid of leeches. You pull the leech off.

[worik]

> You don't stop making blood to get rid of leeches. You pull the leech off.

No. You heat the leech with a match and it falls off.

Fire is the cure

[username135]

Purge with fire. Got it.

[BSEdlMMldESB]

you do if/when you have such a case of leeches that you die.

[multicast]

Wrong. PE investments today make a small portion of the overall portfolio of a pension fund (varies from state to state). In widely swinging markets a PE form that does not speculate in the market but buys and flips with a lot of expertise a private company, and often generates higher and more sustainable returns. This is a reason why PE investments by pension funds are increasing, but they still make a small portion of the pie. In addition, pension funds are not funded through tax money but through portions of ones wage. And not all pension funds are from the state (e.g. CalPERS), most of them are run by pension fund specialized corporations or if big enough by the employer itself.

[lordnacho]

That's more or less correct.

We have so many layers of agency in our economic system, and it isn't really a good thing.