Jeremy Grantham on Private Equity

There is a great interview with money manager Jeremy Grantham of GMO in the weekend Barron’s. Even if you’re not a believer, like him, that we’ve been in a bear market since 2000, albeit one with occasional cyclical rallies, Grantham is always fun to read. He has some savvy musings on margins (they only stay high if capitalism is broken), on moral hazard and the Fed, and then this on the current private equity boom:

What are your thoughts on the big push into hedge funds and private equity?

It is much more complicated when you get to private equity and hedge funds, because these are not really asset classes. These are just a repackaging of existing asset classes, which for hedge funds include commodities and bonds and the kitchen sink.

Private equity is a subset of public equity; it is all interrelated. When do you go public? You go public when IPOs [initial public offerings] are hot. When is that? When the stock market is hot and so on. They are very closely aligned.

What happens there when you push a lot of money out? It flows through to very liquid asset classes, so it doesn’t drive the asset class that much, but you are pulling money out of U.S. equities and pushing money into private equity in the U.S. That doesn’t change a whole lot. What it does is create a huge business environment for the private-equity and hedge-fund managers, and it allows them to charge very handsome fees and it increases competition. It draws in huge quantities of talent that our money-management industry never saw 20 years ago.

Money management was a real backwater 30 years ago to an amazing degree, and now it’s not. The hottest shots used to get s napped up by Goldman Sachs, now Goldman Sachs is bidding with hot-shot hedge funds and often losing.

This has become the best daydream for any graduating MBA, and it might be better than a daydream. In many cases, it gives MBAs the best real shot at making an inevitable fortune in five years, and a lot of fortunes will be made. But the bad news is that it is not just a competition between hedge-fund managers, and that will make it tougher for everybody. Dreary and conservative long-only managers will find it tougher to make money.


  1. Franklin Stubbs says:

    Sneaky gits, putting the second half of the interview behind a subscription firewall. I ponied up another twenty bucks (as a WSJ subscriber) just to hear the rest of what Grantham had to say.