I’ll never forget the day I told old man Moran that I wanted to go to college at Berkeley. It was nineteen eighty-nine (a number, another summer) and I said it just to see if I could get a rise out of the oldster by naming a school as far away from Brooklyn as I could think of. His craggy face crumpled up as if he’d suffered sudden-onset gastric distress and Moran (who’d left Brooklyn exactly once in his life to attend Basic Training before going island-hopping across the Pacific) spat: “Berkeley? Berkeley? That friggin’ place makes Woodstock look like friggin’ Parris Island.”
It’s a real shame that he passed a few years ago (rest well, sir,) because I would’ve loved to see the look on his face when I told him that I’d been invited to help teach a class at Berkeley’s Haas School (thanks, Terry!) I would’ve made sure to tell the old man that people were nude moonbathing or some such nonsense. He would’ve eaten it up.
Anyhow, the whole thing was a blast and the kids were pretty sharp. The lesson for the day was (insert moment of reverence here): The Yale Case. For those who haven’t actually seen the HBS case in question, it’s basically a 20-page precursor to David Swensen’s seminal opus, Pioneering Portfolio Management; it lays out how Yale was able to generate returns that became the envy of the investment world.
Of course, people read the case (or the book) and their response was: we gotta get us some of that illiquid private stuff! You could say that the case study laid the intellectual groundwork for the PE boom. But hey, I’m not complaining; after all, it laid the groundwork for me having a job . . .
So there I was talking about how so many people had taken away the wrong message from the book. The message wasn’t necessarily “do private equity” (or do anything else specific in the book for that matter),” but rather, the message was: “if you’re going to do any of this stuff, you’ve got to do it well!” I mean, look at page 20 of the 2007 Endowment report. Those cats added $11 billion over the trailing 10 years relative to their composite benchmark. Now that’s execution! And execution is critical because the meager (sometimes nonexistent) compensation you typically get for straying from plain vanilla US equity falls far short of compensating you for the risk, illiquidity, and brain drain of playing in those funky asset classes.
But then I started thinking about it and realized that for most people there’s no functional difference between, “do this,” and, “do this well.” Why? Because over 80% of drivers think they’re better than average on the road; most people have a positive bias to their self-image. Come on, if Swensen can put up Top Quartile numbers, why can’t I? After all, I’m good enough, I’m smart enough, and doggone it, people like me!
Of course, that’s private equity’s analogue to the preponderance of drivers thinking they’re better than the average bear: the comically-large cohort of managers who claim to be top quartile. In fact, I’ve been wondering lately if someone should start a top quartile verification service that would provide seals of approval for pitchbooks (or maybe special gold stars to sprinkle liberally in track record sections of PPMs). Not that it matters: the opportunity costs are so high (particularly today) that being top quartile likely won’t even begin to cover those high opportunity costs.
So the more I noodled on it, the more I thought that maybe Pioneering Portfolio Management should come with a disclaimer: don’t try this at home. Of course, trying this at home was exactly what the next book was about.