Episode 409: Investment Banker - What Private Equity Doesn't Tell You

In this episode, we are joined by Jeff Hooke, former investment banking, private equity, and private debt executive turned academic critic of alternative investments, for a rigorous and provocative examination of private equity, private credit, and institutional investing. Jeff draws on decades of experience in finance and years of academic research to challenge many of the assumptions driving institutional and retail allocations to private markets. We discuss why pension plans and endowments continue pouring capital into alternatives despite evidence of underperformance, how private market valuations can obscure true risk, and why the fee structures embedded in private funds create enormous hurdles for investors. Jeff explains the methodological challenges of benchmarking private investments, the role of investment consultants and industry incentives, and why illiquidity and opaque reporting make private assets especially difficult for retail investors to evaluate. Along the way, we explore survivorship bias, public market equivalents, unrealized valuations, and the growing push to bring private assets into retirement portfolios. This conversation is an in-depth look at the incentives, risks, and realities shaping the modern alternatives industry.

Key Points From This Episode:

(0:00:18) Introduction to Jeff Hooke and the focus on private equity, private credit, and alternative investments.

(0:04:21) Why institutions and retail investors continue allocating heavily to alternatives.

(0:04:33) What institutional investors are and how pension plans and endowments operate.

(0:05:52) Why institutional staff may prefer complexity over simple index investing.

(0:07:55) How early private equity outperformance fueled lasting enthusiasm for alternatives.

(0:08:47) Why trustees often rely heavily on staff and consultants for investment decisions.

(0:09:29) The social and psychological appeal of "exotic" investments.

(0:10:28) Why institutional investors often resist criticism of private markets.

(0:11:56) The CalPERS example: underperforming a simple 60/40 index despite complexity.

(0:13:28) The role investment consultants play as institutional "gatekeepers."

(0:15:42) Why many pension plans and endowments may have underperformed due to alternatives.

(0:17:26) Findings from The Grand Experiment and research on private equity fund performance.

(0:18:30) Why institutions struggled to replicate Yale's endowment success under David Swensen.

(0:20:57) Gross versus net performance in private equity—and the impact of fees.

(0:21:30) The extreme dispersion between top- and bottom-performing private equity funds.

(0:23:26) The weak persistence of private equity manager outperformance.

(0:25:27) Why private investments expanded rapidly after the Global Financial Crisis.

(0:25:54) The illusion of smoother returns in private markets due to subjective valuations.

(0:28:13) Why benchmarking private equity performance is methodologically difficult.

(0:31:13) How private market data can support conflicting performance narratives.

(0:33:41) Why public market equivalent (PME) is one of the best benchmarking approaches.

(0:36:59) Survivorship bias and non-reporting funds in private market databases.

(0:40:09) The rise of private credit and its role in financing leveraged buyouts.

(0:42:29) Findings from Jeff's private credit research: no evidence of outperformance versus public ETFs.

(0:45:15) Jeff's response to Cliffwater's critique of his private credit paper.

(0:47:15) Why retail investors may underestimate the risks and costs of private alternatives.

(0:49:14) Conflicts of interest and fee incentives in wealth management distribution.

(0:51:03) The impact of unrealized valuations and unsold holdings on reported returns.

(0:53:15) Why many private equity funds still hold large unrealized positions after a decade.

(0:56:05) Whether private equity ownership actually improves company operations.

(0:57:42) The major liquidity risks facing retail investors in private funds.

(0:59:20) Canadian private real estate funds, gating, and redemption problems.

(1:02:01) Comparing private market fees to ultra-low-cost public index funds.

(1:06:46) The long-term impact of bringing private assets into retail retirement accounts.

(1:08:17) How much "play money" investors should allocate to speculative alternatives.

(1:10:49) Why leverage layered on top of private funds creates additional risk.

Links From Today's Episode:

Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on YouTube — https://www.youtube.com/channel/
Benjamin Felix — https://pwlcapital.com/our-team/

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com)