Private vs. Public Markets: The Illiquidity Premium

Introduction: The Pension Fund Propellant
The Appeal of Private Equity’s Purported Promise
The Complications of Competition
The Concern with IPOs: A Seller’s Market
Dry Powder Targets: Potential Winners
Conclusion & Exhibits

Introduction: The Pension Fund Propellant

With 2018 IPO activity reaching its highest level since 2014 some industry commentators have speculated that 2019 could be an even bigger year due to a stampede of Unicorns. Research from both academics and the NBER have estimated that many of these unicorns could be overvalued by as much as 50%.^{1,2,3,4,5,6,7} Kailash has read reports by McKinsey & Company⁸ and Bain & Company.⁹ Both publications were largely intellectually congruent concluding that private equity has performed well, continues to raise large amounts of capital and has become a consensus “buy.” McKinsey also notes that US Pensions are the largest existing LPs.¹⁰

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The McKinsey report led out with a staggering chart (Fig. 1 below) showing the average funding gap of US public pensions had exploded from $1.8 trillion in 2007 to roughly $3.8 trillion since the Great Financial Crisis. Despite the near 13% annual returns of public equity markets, to which public pensions are heavily exposed, a confluence of events have caused that funding gap to persist. Aside from falling expected rates of return and revised mortality rates, the report implies that a primary cause was that while “…most pensions have sizeable exposure to equities, many recognized significant losses at the time of the downturn and did not reallocate with sufficient alacrity to take full advantage of the past decade’s bull run¹¹.”

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As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade. If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you. KCR also offers a wide range of easy-to-use but sophisticated tools. Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
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Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

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