A highly-regarded professor at Harvard Business school is claiming that he’s come up with a better alternative to private equity by recreating their returns through an array of publicly traded companies peppered with debt and options. An article in Bloomberg details how Randy Cohen is selling his students on the strategy of taking data from the holdings of 1000 private equity firms and go after the same kinds of companies in public markets to capture the same amount of value.
The idea is a bit revolutionary for a school whose alumni include some of the titans of private equity and that churns out graduates who flock to the industry to collect its hefty fees and keep 1/5th of the profits, but Cohen isn’t alone:a new group of idealistic researchers and financiers are founding businesses to sell what Bloomberg calls “PE-lite.” Wanting to tap into private equity out of fears that publicly traded stocks and bonds have had their time, investors are looking or alternatives that could offer the same high returns.
But results have been mixed; the handful of firms that have attempted to replicate PE returns have garnered several hundred million, in what basically amounts to a rounding error in the money management world, the article notes. But Cohen’s fellow Harvard Business School professor Erik Stafford argues that by purchasing a basket of value stocks and using similar leverage, investors could get roughly similar returns of buyout funds, and in fact even make out better because they wouldn’t be paying the high fees. Applying his strategy from 1994 to 2017, it would’ve generated an average annual return rate of 14.5% as opposed to 11.4% for PE funds.
Cohen founded PEO Partners in 2019, which looks to approximate Cambridge Associates’ U.S. private equity index by investing in publicly traded companies in the Russell 3000 index and using options to hedge against ups and downs in the market. While it’s too new to tell if it will replicate private equity, Cohen is optimistic even in the face of those who are skeptical, saying his job as a professor has him constantly seeing beyond the status quo and coming up “with something new and true.”