“I can observe Zidane, but I’ll never dribble like him”, says Ludovic Phalippou. “We tend to make people heroes and want to imitate them, but that’s not how it works.”
Phalippou, Professor of Financial Economics at the University of Oxford Saïd Business School, is having a beer at the Room Mate Aitana hotel in Amsterdam, having just finished his second and final day of the course on Investing in private markets.
“Asset management works the same as in football. People see a guy who’s good and say: he must be a genius. His way is the only way.”
“But you have to realize it is very complicated. The current state of the world is very complicated. Today, I talked about all those tricks and things in order for my students not to be taken for a ride. You need to deploy a good strategy. It depends on your size, on what you know. That’s cutting-edge.”
It’s important to Phalippou that his students know how private markets work. “Those markets are the future, I think. Stock markets are doomed. They’re something of another age. The public stock markets have very little use, while the private equity markets are growing very fast and they will continue to grow.”
The problem is that it took a hundred years to get clear rules for public markets, but those are lacking for the private market. “Rules are very basic: you can’t lie. But misleading info is not the same as lying.”
The situation makes him nervous. “It’s pretty complex. A lot of people in class were surprised when I showed them the example of the Internal Rate of Return.” The Internal Rate of Return, or IRR, is commonly used to evaluate the performance of private equity. “They never realized it’s bullshit.”
“The numbers are not fake, but the calculation is stupid, which makes the numbers useless.”
“A thirty-years IRR might be amazing even though half of the deals were bankrupted in the last ten years. IRR is often meaningless. Using it as a benchmark is meaningless. Comparing IRRs is meaningless.”
“The problem with bullshit is that you cannot compare it to bullshit”, Phalippou says matter-of-factly, without venom. “Bullshit-to-bullshit does not work like apple-to-apple.”
“This is fascinating because so many people are happy with an exaggerated performance figure, even if it does not reflect reality. Consultants are happy, pension fund managers are happy, trustees are happy. Everybody’s happy and the only who should be unhappy is the pensioner.”
“When I say that this is stupid, people often reply: you don’t have the perfect way. I say no, but I have a much better way. So you shouldn’t stick to the stupid way.”
During the day, Phalippou had his bike parked outside the function room in the hotel. He may not be able to dribble like Zidane, but he’s an avid cyclist and he’s training for a race that’s taking place the following Saturday. Having finished his beer, he’s ready to leave.
“I should have had a hundred students in there today. Many people in Amsterdam deal with private markets. They need to know these things.”
He steps on his bike and rides off.
Join ambitious professionals for the two day ‘Investing in private markets‘ program, taught by Ludovic Phalippou (University of Oxford Saïd Business School) at Amsterdam Institute of Finance.