Episode summary
274: Randy Cohen, Prof of Entrepreneurship & Finance Harvard Business School Co-Founder PEO Partners
Alpha Exchange
· · 58 min · Guests: Randy Cohen
Summary
Randy Cohen argues that “liquid PE” can replicate much of private equity’s return profile in public markets by combining the same economic exposures buyout firms seek: profitability, value, payout power, lower risk and smaller size. He frames leveraged buyout targets as “LBOable” companies that naturally overlap with the classic Fama-French factors, then adds moderate leverage and hedges to mimic the smoother ride that investors expect from private equity.
He emphasizes that this is not a replacement for top-tier private equity. Traditional PE still has advantages from inside information, operational improvements, and control rights. But Cohen says those advantages may still leave enough excess return on the table for a lower-fee public-market strategy to be competitive on a net basis, especially because PE fees can be very high.
Cohen also situates the idea in a broader research philosophy shaped by puzzles and changing markets. He discusses momentum, market anomalies, and why new instruments and sectors constantly create fresh opportunities for asset managers. On that view, liquid PE is another example of taking a real private-market process, understanding the economics behind it, and rebuilding it more transparently in public markets.
Key takeaways
- Randy Cohen says LBO targets are typically high-profit, low-multiple, low-risk, high-payout, smaller companies, which map closely to the five Fama-French factors.
- He argues that liquid PE can mimic much of private equity by buying similar public companies, adding modest leverage, and hedging for the smoothing investors expect.
- Cohen estimates liquid PE may lag traditional PE by 3% to 6% gross, but could still compete after fees because PE charges can exceed 700 basis points a year.
- He says the strategy is meant as a portfolio tool for investors who cannot access PE, and as a liquidity buffer for those who already can.
- Cohen’s view is that markets keep changing, so new inefficiencies keep appearing even as old ones get arbitraged away.
Notable quotes
“This is a solution to take their portfolio from 6040 to 50 3020”
“the five FMA French factors. The exact five things that Gan and Ken identified as the things that um uh lead to outperformance in the public markets are the five things that you have to do as an LBO manager”
“I would claim behind traditional PE but once you add up operator fees monitoring fees origination fees management fees carried interest PE according to the CalPER study charges over 700 basis points a year in fees”
“you need to overlay a hedge to satisfy investors who have that concern”
“liquid PE on a gross basis is going to be three to six percent a year I would claim behind traditional PE”
How the episode opens
That's why I think the idea of liquid PE is so is so powerful. And you notice it doesn't have to compete with PE. The notion is not, oh my gosh, people should ditch their PE and put it in liquid PE.
The idea is for investors who can't invest in private equity because they're just not rich enough to make million-dollar minimums. This is a solution to take their portfolio from 6040 to 50 3020. And for institutional investors and wealthy families who are PE investors, this can play a really useful role as a tool in the toolbox for them uh as a liquidity buffer.
uh or for completion portfolios uh for for other kinds of applications that are hard to do with traditional PE.
I'm joined today by Randy Cohen. He is a professor of finance and entrepreneurship at Harvard Business School, also a co-founder of PEO Partners. Randy, it has been great to reconnect with you recently and it's a pleasure to welcome you to the podcast.
Uh thanks so much for having me, Dina. Obviously uh you know you and I um uh met all the way back in PhD program at Chicago uh in the '90s when I was studying there and and and uh and you were there and and you know you and I had uh we started arguing about you know philosophy and politics and finance and everything from the very beginning and it has been great to reconnect in in uh recent years and and get to uh renew the conversation.
Well, I was a 24 year old at the University of Chicago. I was one of the brave ones that uh took FMA's class. I was writing in the forget what it was called, the the GSB newspaper and you and I went back and forth and then I learned that you were the TA for the FMA class.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- private equity replication
- leveraged buyouts
- public vs private markets
- valuation smoothing
- private equity fees
Companies and tickers mentioned
- PEO Partners
Watch the episode
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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Alpha Exchange, this episode and its artwork belong to Dean Curnutt. Octagon is not affiliated with the show; this page is an independent summary.
