Episode summary
Private Equity's Low Volatility Isn't Real
The Meb Faber Show
· · 1 hr 17 min · Hosts: Meb Faber · Guests: Owen Lamont, Randy Cohen
Summary
The guests argue that private equity’s headline advantage is real performance, but its supposedly low volatility is not. Owen Lamont says much of the appeal comes from smoothing, because private marks can lag public markets in stress periods like 2020, making drawdowns look smaller than what an actual sale would have shown. Randy Cohen adds that PE’s structure still makes sense economically: it targets profitable, low-multiple, lower-risk companies, adds leverage, and benefits from industry selection, but he argues public markets can mimic much of that mix.
That leads to the case for “liquid private equity,” which Cohen describes as a way to replicate PE-like exposures in public markets with daily liquidity, tax efficiency, and better access for institutions and retail investors. He says the strategy is built around the same factors PE likes — high profit, high payout, low multiple, low risk, and smaller size — plus modest portfolio leverage. Lamont pushes back that the pricing in private markets is not really a price if it cannot be traded, but he agrees the implementation problem is interesting.
The discussion broadens into market structure, with Korea, IPO drought, AI, valuation, and interest rates all tied to the same theme: flows, narratives, and leverage can move markets in ways that are hard to reconcile with neat fundamentals. They also revisit Cohen’s “best ideas” work, arguing that a manager’s highest-conviction stocks can outperform the rest of the same portfolio, but that does not mean concentrated portfolios are automatically superior.
Key takeaways
- Cohen argues PE has beaten public markets by roughly 2 to 4% a year over the last few decades, but the reported low volatility is heavily affected by smoothing.
- Lamont says a private asset that cannot be traded at its stated mark is not really revealing a true market price.
- Cohen says liquid private equity can be built in public markets by copying PE’s factor tilts and adding only about 0.3 turns of leverage.
- Lamont says institutional investors like the idea of liquid PE, but many still want to see others go first before writing a check.
- Cohen says the biggest IPO drought in decades could be a sign of bubble conditions, since major market bubbles usually bring a wave of issuance.
- On “best ideas” investing, Cohen says a manager’s top picks outperformed the rest of the same portfolio by about 4% a year in his study.
Notable quotes
“PE has delivered 2 to 4% a year ahead of the public markets over the last few decades, which is a lot”
“there is smoothing in these returns since nobody knows exactly what a private company is worth”
“What if we developed liquid private equity? We said, "We're just going to copy every smart thing we can find that PE does”
“Those are the five French factors. So the exact five things that a quant will tell you leads to outperformance are the same things LBO focuses on”
“I think that is responsible for a lot of the growth”
How the episode opens
Welcome to the Met Favor Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Met Faber is the co-founder and chief investment officer at Camry Investment Management. Due to industry regulations, he will not discuss any of Camry's funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Camrian Investment Management or its affiliates. For more information, visit cambrianvestments.com.
Welcome back everybody. Today we have one of our favorite guests back on the show and this time he brought a friend. We got Owen Lamont, portfolio manager at Acadian Asset Management.
He's been on the faculty at Harvard, Princeton, Yale, University of Chicago. He also writes the blog Owenomics. And he brought Randy Cohen.
Ry's professor of finance unit at Harvard Business School. has such a fascinating bio we'll get into, including some of my favorite papers over the years. I'm sure you guys have seen us send out a few of these.
The idea farm, Owen and Randy, welcome to the show.
Great to be here. — Owen, we had a blast a couple years ago and I told you this time, I said, you know, you can bring somebody, bring a friend. Could have brought anybody and you said, "This guy Randy, he's a banger. I'm going to bring this this dude." Tell tell why why did you pick Randy and how long y'all known each other?
Well, I was Ry's professor at the University of Chicago. It was Randy is going to know better, but it was probably in the late '9s.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- liquid private equity
- modeling private equity in public markets
- market valuations
- ai and the cape ratio
- ipo landscape
Companies and tickers mentioned
- Acadian Asset Management
- PEO Partners
Watch the episode
Watch “Private Equity's Low Volatility Isn't Real” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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The Meb Faber Show, this episode and its artwork belong to The Idea Farm. Octagon is not affiliated with the show; this page is an independent summary.
