inflows to private equity

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blackburnian
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inflows to private equity

Post by blackburnian »

Interesting article in the WSJ today about large inflows to private equity from individual investors: "Wealthy Investors Pile Into Private Equity to Escape Stock Volatility," by Chris Cumming
One quote from the article: "Fund managers and their advisers don’t expect retail demand to dry up anytime soon, particularly as more investors reject a traditional 60-40 allocation between stocks and bonds, according to Mr. Hutten [Michael Hutton of Pantheon Ventures]. 'Bonds have always been the ballast when equities are going down. If they’re not, where do you turn?' he said. Private-fund managers 'will be the beneficiaries' of the turmoil in public markets, he said."
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arcticpineapplecorp.
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Re: inflows to private equity

Post by arcticpineapplecorp. »

why would one assume private equity is less volatile than the stock market? Because it's not liquid? Because it's not mark to market except on a quarterly basis?

a stock (private or public) is risky by definition.

i think it's funny that people say bonds are supposed to provide ballast, as if that means they're never to lose money. Bonds (high quality, short to intermediate) have lost around 10% or half as much as equities did recently (-20% for equities recently). That says to me that bonds are less risky than stocks. Why would one think that private equity would be less risky than bonds when they're stocks?
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Valuethinker
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Re: inflows to private equity

Post by Valuethinker »

arcticpineapplecorp. wrote: Thu May 26, 2022 3:49 pm why would one assume private equity is less volatile than the stock market? Because it's not liquid? Because it's not mark to market except on a quarterly basis?

a stock (private or public) is risky by definition.

i think it's funny that people say bonds are supposed to provide ballast, as if that means they're never to lose money. Bonds (high quality, short to intermediate) have lost around 10% or half as much as equities did recently (-20% for equities recently). That says to me that bonds are less risky than stocks. Why would one think that private equity would be less risky than bonds when they're stocks?
You've nailed it.

Returns are "smoothed". Until a business is sold you don't know what it is worth, really. So PE firms "smooth" their reporting and you don't really find out until the business is sold. Yes they use comparable multiple approach (EV/ EBITDA typically). But they pick the peer group. Auditors can't push back on every valuation of every investment. The accounting rules permit wide discretion.

A *lot* of money has gone into private assets. Whilst I am sure there are pockets of value, this feels like "late to the party". Prices of assets have certainly been bid up. Fees are high - academic research shows only the top quartile of partnerships sustainably outperform, and there is further research which found that even that outperformance is questionable when you adjust for other factors.

Conversely quoted companies are a lot cheaper than they were. So are bonds.

In principle there are greater opportunities outside the US for PE, where the industry is less well developed. I know UK/ Europe and I would say that the amount of money raised, relative to the smaller set of opportunities, is just as bad.

Venture Capital is a whole 'nother type of business. I would say to most investors "just don't". You'll never have access to the funds that have shown sustainable outperformance.
afan
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Re: inflows to private equity

Post by afan »

There is no public reporting of how much money has gone into private equity. The managers are not required to report it. As far as I know no one knows how much money there is in private equity.

So... How does the author know it is true that more money is going into these investments? Because a handful of managers mentioned said they are seeing inflows? How do they know that even that is true?

I would have loved to have seen an article documenting flows, if there existed systematic data.
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blackburnian
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Re: inflows to private equity

Post by blackburnian »

afan wrote: Thu May 26, 2022 4:22 pm There is no public reporting of how much money has gone into private equity. The managers are not required to report it. As far as I know no one knows how much money there is in private equity.
So... How does the author know it is true that more money is going into these investments? Because a handful of managers mentioned said they are seeing inflows? How do they know that even that is true?
Good point. All the evidence in the article is along the lines of "Private-fund managers say, ..." (plus guesses based on outflows from mutual funds), and the reporter himself writes, "There is little, if any, reliable data on how much money private-equity firms as a whole raise from individual investors."
LearnFin
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Re: inflows to private equity

Post by LearnFin »

Valuethinker wrote: Thu May 26, 2022 4:18 pm
arcticpineapplecorp. wrote: Thu May 26, 2022 3:49 pm why would one assume private equity is less volatile than the stock market? Because it's not liquid? Because it's not mark to market except on a quarterly basis?

a stock (private or public) is risky by definition.

i think it's funny that people say bonds are supposed to provide ballast, as if that means they're never to lose money. Bonds (high quality, short to intermediate) have lost around 10% or half as much as equities did recently (-20% for equities recently). That says to me that bonds are less risky than stocks. Why would one think that private equity would be less risky than bonds when they're stocks?
You've nailed it.

Returns are "smoothed". Until a business is sold you don't know what it is worth, really. So PE firms "smooth" their reporting and you don't really find out until the business is sold. Yes they use comparable multiple approach (EV/ EBITDA typically). But they pick the peer group. Auditors can't push back on every valuation of every investment. The accounting rules permit wide discretion.

A *lot* of money has gone into private assets. Whilst I am sure there are pockets of value, this feels like "late to the party". Prices of assets have certainly been bid up. Fees are high - academic research shows only the top quartile of partnerships sustainably outperform, and there is further research which found that even that outperformance is questionable when you adjust for other factors.

Conversely quoted companies are a lot cheaper than they were. So are bonds.

In principle there are greater opportunities outside the US for PE, where the industry is less well developed. I know UK/ Europe and I would say that the amount of money raised, relative to the smaller set of opportunities, is just as bad.

Venture Capital is a whole 'nother type of business. I would say to most investors "just don't". You'll never have access to the funds that have shown sustainable outperformance.

Regarding funds with sustainable outperformance - can you name a few? Is Tiger Global PIP, KKR NGT, Silverlake, Permira, Insight and Lexington partners are in the good performance list?

Thanks
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Re: inflows to private equity

Post by exodusNH »

arcticpineapplecorp. wrote: Thu May 26, 2022 3:49 pm why would one assume private equity is less volatile than the stock market? Because it's not liquid? Because it's not mark to market except on a quarterly basis?

a stock (private or public) is risky by definition.

i think it's funny that people say bonds are supposed to provide ballast, as if that means they're never to lose money. Bonds (high quality, short to intermediate) have lost around 10% or half as much as equities did recently (-20% for equities recently). That says to me that bonds are less risky than stocks. Why would one think that private equity would be less risky than bonds when they're stocks?
Rational Reminder did a segment on this.

People had a preference for PE because of the (apparent) smooth returns due to lack of regular reporting/valuation. Most of the funds did no better to slightly worse than an equivalently risky portfolio in public equity.

There was also evidence that the PE performance has declined from its peak, possibly because investors are accepting lower return due to the lower apparent volatility.
bagastuff
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Re: inflows to private equity

Post by bagastuff »

exodusNH wrote: Thu May 26, 2022 11:34 pm
arcticpineapplecorp. wrote: Thu May 26, 2022 3:49 pm why would one assume private equity is less volatile than the stock market? Because it's not liquid? Because it's not mark to market except on a quarterly basis?

a stock (private or public) is risky by definition.

i think it's funny that people say bonds are supposed to provide ballast, as if that means they're never to lose money. Bonds (high quality, short to intermediate) have lost around 10% or half as much as equities did recently (-20% for equities recently). That says to me that bonds are less risky than stocks. Why would one think that private equity would be less risky than bonds when they're stocks?
Rational Reminder did a segment on this.

People had a preference for PE because of the (apparent) smooth returns due to lack of regular reporting/valuation. Most of the funds did no better to slightly worse than an equivalently risky portfolio in public equity.

There was also evidence that the PE performance has declined from its peak, possibly because investors are accepting lower return due to the lower apparent volatility.
I too have a preference for the UI of my vanguard 401k which doesn't use red or green or tell me daily changes, just plots a low fidelity graph of returns over the last ten years.
Nathan Drake
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Re: inflows to private equity

Post by Nathan Drake »

exodusNH wrote: Thu May 26, 2022 11:34 pm
arcticpineapplecorp. wrote: Thu May 26, 2022 3:49 pm why would one assume private equity is less volatile than the stock market? Because it's not liquid? Because it's not mark to market except on a quarterly basis?

a stock (private or public) is risky by definition.

i think it's funny that people say bonds are supposed to provide ballast, as if that means they're never to lose money. Bonds (high quality, short to intermediate) have lost around 10% or half as much as equities did recently (-20% for equities recently). That says to me that bonds are less risky than stocks. Why would one think that private equity would be less risky than bonds when they're stocks?
Rational Reminder did a segment on this.

People had a preference for PE because of the (apparent) smooth returns due to lack of regular reporting/valuation. Most of the funds did no better to slightly worse than an equivalently risky portfolio in public equity.

There was also evidence that the PE performance has declined from its peak, possibly because investors are accepting lower return due to the lower apparent volatility.
Yes, basically if you want Private Equity like returns or diversification, but without the huge drag due to fees, just invest in Small Cap Value. Similar risk profile, better returns (but more transparent volatility)

On average you will greatly outperform PE net of fees. There is no “illiquidity premium” due to the smoothed return and illusion of lack of volatility.
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Beliavsky
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Wealthy Investors Pile Into Private Equity to Escape Stock Volatility

Post by Beliavsky »

[Merged with previous discussion -- moderator oldcomputerguy]

Maybe these private markets have merit, but the lower volatility is largely an illusion coming from lack of daily quotes. It's like saying a 5-year bank CD has zero volatility because it is not traded.

Wealthy Investors Pile Into Private Equity to Escape Stock Volatility
Individual investors are pushing cash into private markets as public markets tumble, fund managers say
By Chris Cumming
Wall Street Journal
May 26, 2022 6:30 am ET
Individual investors are increasing their bets on private-equity vehicles, hoping that these funds’ long-term horizon will offer a refuge from volatile public stock and fixed-income markets.

Private-fund managers say inflows of money from wealthy individual investors have increased this year, and asset managers expect the trend to continue as higher interest rates and inflation weigh on publicly traded assets.

With the S&P 500 down about 17% and U.S. aggregate bond indexes falling about 8% this year through May 25, stock and bond mutual funds have begun seeing outflows of tens of billions of dollars a week, according to data from the Investment Company Institute, the main lobbying group for fund managers.

Private-markets funds have been enjoying inflows amid the turmoil in public markets, said Anastasia Amoroso, chief investment strategist at iCapital Network Inc., a financial-services company that gives high-net-worth investors access to private-equity funds. Assets serviced by iCapital have risen by about 16% in the first four months of 2022, to $125 billion, according to the firm.

People are attracted to the premise that private funds can avoid daily price swings and potentially scoop up bargains when markets fall, according to Ms. Amoroso, who added that private-credit and private real-estate funds have been in particularly high demand.

...
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Re: Wealthy Investors Pile Into Private Equity to Escape Stock Volatility

Post by Nowizard »

There seems to be a pattern that is a mixture of the fact that the wealthy have options for investment most of us do not with the belief that their exceptional wealth also translates into access to more. There are always those who wish to reinvent the wheel, and there are those who will propose they have done so. Hedge funds are an example, as is Madoff. As others, the very wealthy are probably anxious when wealth declines and look for places to invest. Different vehicles but similar to us poorer stiffs wondering if it would be wise to move some from Total Bond to Short Term Bond indexes, purchase IBonds, get out of the market, etc. Meanwhile, many of us will simply make minor changes or stay the course. To each their own, and envy of the very wealthy comes with caution. Sometimes, the actionable piece to investing is to such up the anxiety and do little or nothing.

Tim
Booglie
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Re: Wealthy Investors Pile Into Private Equity to Escape Stock Volatility

Post by Booglie »

They will leave regular investors pulling out their hair while they try to get 0.05% returns on VT, while at the same time they profit from private equity and squeeze you with their hedge funds. :wink:
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Re: Wealthy Investors Pile Into Private Equity to Escape Stock Volatility

Post by andypanda »

"Individual investors are increasing their bets"

When I want to place a bet I go to a casino. Otherwise I stick to investing.
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Re: Wealthy Investors Pile Into Private Equity to Escape Stock Volatility

Post by Booglie »

andypanda wrote: Fri May 27, 2022 6:59 am "Individual investors are increasing their bets"

When I want to place a bet I go to a casino. Otherwise I stick to investing.
On a side note, we should take a few things more seriously.
If wealthy investors are fleeing the open stock market for private equity to escape volatility, it means the wealthy are themselves "saying" volatility is too high.

A main issue here, however, is that if we start having funds on closed capital companies, those funds will start having inflows and outflows similar to the current stock market. So, there is a serious chance their volatility will increase.

All that being said, I'm checking right now some private equity funds in my country, and while they all have different returns (which is a good sign, meaning they are not correlated, so you can have true diversification), their returns are not particular stellar.

Maybe there are super-secret funds for the wealthy with stellar returns?
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Re: Wealthy Investors Pile Into Private Equity to Escape Stock Volatility

Post by Random Musings »

Amazing that a WSJ article said investing in private equity "escapes" volatility.

Of course, it introduces another issue, liquidity. Perhaps not a problem for all PE buyers, but it may for some.

RM
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Re: Wealthy Investors Pile Into Private Equity to Escape Stock Volatility

Post by jeffyscott »

Beliavsky wrote: Fri May 27, 2022 6:22 amMaybe these private markets have merit, but the lower volatility is largely an illusion coming from lack of daily quotes. It's like saying a 5-year bank CD has zero volatility because it is not traded.
Yes, but at least with a CD it is factually true that you will get your money plus the interest when it matures.

If anything, I would guess private equity is probably higher volatility :?:
(according to Ms. Amoroso) People are attracted to the premise that private funds can avoid daily price swings
In fact, what it seems that they are attracted to is not being told what the price is on a daily basis. If they called in every day and asked how much they would get if the sold out today, that would tell them what the actual volatility is.
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Re: Wealthy Investors Pile Into Private Equity to Escape Stock Volatility

Post by Booglie »

jeffyscott wrote: Fri May 27, 2022 7:15 am
Beliavsky wrote: Fri May 27, 2022 6:22 amMaybe these private markets have merit, but the lower volatility is largely an illusion coming from lack of daily quotes. It's like saying a 5-year bank CD has zero volatility because it is not traded.
Yes, but at least with a CD it is factually true that you will get your money plus the interest when it matures.

If anything, I would guess private equity is probably higher volatility :?:
(according to Ms. Amoroso) People are attracted to the premise that private funds can avoid daily price swings
In fact, what it seems that they are attracted to is not being told what the price is on a daily basis. If they called in every day and asked how much they would get if the sold out today, that would tell them what the actual volatility is.
It's not so simple.

In a perfectly rational and fair market, you could argue that the amount of inflows and outflows make no difference, because people would always perfectly arbitrage the price.

But remember: the market is not rational. If there are people buying and selling every day, the inflows and outflows themselves create volatility, because it gives more room for panic buying / selling, with the algos replicating and amplifying the panic buying / selling.
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Re: Wealthy Investors Pile Into Private Equity to Escape Stock Volatility

Post by gonefishing01 »

Random Musings wrote: Fri May 27, 2022 7:13 am Amazing that a WSJ article said investing in private equity "escapes" volatility.

Of course, it introduces another issue, liquidity. Perhaps not a problem for all PE buyers, but it may for some.

RM
Exactly. A “long time horizon” works just as well with VTI (probably better tbh). Or real estate if you don’t need the liquidity. PE isn’t a special get out of volatility free card just because you can’t see the ticker moving around every day on your phone app.
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Re: Wealthy Investors Pile Into Private Equity to Escape Stock Volatility

Post by Beliavsky »

jeffyscott wrote: Fri May 27, 2022 7:15 am
Beliavsky wrote: Fri May 27, 2022 6:22 amMaybe these private markets have merit, but the lower volatility is largely an illusion coming from lack of daily quotes. It's like saying a 5-year bank CD has zero volatility because it is not traded.
Yes, but at least with a CD it is factually true that you will get your money plus the interest when it matures.

If anything, I would guess private equity is probably higher volatility :?:
(according to Ms. Amoroso) People are attracted to the premise that private funds can avoid daily price swings
In fact, what it seems that they are attracted to is not being told what the price is on a daily basis. If they called in every day and asked how much they would get if the sold out today, that would tell them what the actual volatility is.
There is an illiquid secondary market for stakes in private equity funds. The Harvard university endowment sold private equity in the 2008 financial crisis. I wonder what the volatility of private equity would be if measured using secondary market prices. I bet that those prices have a high beta to listed equity markets.
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Re: inflows to private equity

Post by JackoC »

The idea you reduce risk purely from decreasing liquidity is silly, I agree with general criticism of the article to the extent it suggests that's actually true (could be true that investors are comforted by that idea). Everyone could see this in a 'blind trust' with manager constrained to invest long only in conventional liquid stocks or stock funds, with diversification, but your money locked up for X years, exact contents not revealed to you and value reported only periodically. You would not be escaping volatility, just be unable to see what anyone who knew the trust's contents could see.

The example above is obvious but the question with various non-mark-to-market structures is if the underlying assets 'deserve' an illiquidity premium or are otherwise different in some important way from what you can access in low cost fund. That varies in real examples I think. Somebody said small cap value is basically the same as private equity. Without particularly endorsing private equity (in the real world of fees) I'm not sure that's true in general or would always have to be*. Another everyday example is REIT's vs direct rental real estate. REIT prices are more volatile than any data series of underlying property prices, residential or commercial, even adjusting for leverage. That's at least partly due to 'smoothing' effects in even the best RE price indices. But, the market for all assets isn't IMO so 100% purely efficient that you can derive the volatility of single family from even single fam focused REIT prices and say that's the right answer and Case Shiller's far lower vol is entirely an artifact of data issues. The small property REIT might be getting 'pulled along' with other stock-like securities so that the REIT tends to get cheap relative to small properties in sudden stock downturns and expensive in sudden stock market pops. Which you'd arbitrage by buying/shorting small properties against the REIT...except you can't easily do that (can't short at all basically). It's illiquid assets in an ostensibly liquid 'wrapper', basically opposite mismatch to the first example (liquid securities in an illiquid wrapper).

It can be difficult to determine the actual illiquidity premium on offer. That IMO tends to come out as a disadvantage to PE funds practically: you know for a fact you pay more in expenses, but there's uncertainty how much real illiquidity premium will derive from the underlying assets. However it doesn't mean illiquidity premium doesn't exist and that public equity is the 'super asset' among risk assets rendering all others worthless.

*various non-US markets historically have more corporate assets owned in structures other than public equity. The US or world market could evolve. One particular issue, hoping for future new tech giant windfalls contributing to public index return, is if future ones don't IPO till they get much bigger, more of the windfall going to private. That doesn't necessarily mean 'OK, just do some PE or venture capital', because of the expenses. But could still mean return of the public index is less.
Last edited by JackoC on Fri May 27, 2022 9:09 am, edited 1 time in total.
Valuethinker
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Re: inflows to private equity

Post by Valuethinker »

LearnFin wrote: Thu May 26, 2022 10:38 pm
Valuethinker wrote: Thu May 26, 2022 4:18 pm
arcticpineapplecorp. wrote: Thu May 26, 2022 3:49 pm why would one assume private equity is less volatile than the stock market? Because it's not liquid? Because it's not mark to market except on a quarterly basis?

a stock (private or public) is risky by definition.

i think it's funny that people say bonds are supposed to provide ballast, as if that means they're never to lose money. Bonds (high quality, short to intermediate) have lost around 10% or half as much as equities did recently (-20% for equities recently). That says to me that bonds are less risky than stocks. Why would one think that private equity would be less risky than bonds when they're stocks?
You've nailed it.

Returns are "smoothed". Until a business is sold you don't know what it is worth, really. So PE firms "smooth" their reporting and you don't really find out until the business is sold. Yes they use comparable multiple approach (EV/ EBITDA typically). But they pick the peer group. Auditors can't push back on every valuation of every investment. The accounting rules permit wide discretion.

A *lot* of money has gone into private assets. Whilst I am sure there are pockets of value, this feels like "late to the party". Prices of assets have certainly been bid up. Fees are high - academic research shows only the top quartile of partnerships sustainably outperform, and there is further research which found that even that outperformance is questionable when you adjust for other factors.

Conversely quoted companies are a lot cheaper than they were. So are bonds.

In principle there are greater opportunities outside the US for PE, where the industry is less well developed. I know UK/ Europe and I would say that the amount of money raised, relative to the smaller set of opportunities, is just as bad.

Venture Capital is a whole 'nother type of business. I would say to most investors "just don't". You'll never have access to the funds that have shown sustainable outperformance.

Regarding funds with sustainable outperformance - can you name a few? Is Tiger Global PIP, KKR NGT, Silverlake, Permira, Insight and Lexington partners are in the good performance list?

Thanks
KKR has been in the category of mediocre performance since Barbarians at the Gate (1990) I believe.

Silverlake is good.

Permira has done well in Europe.

The others I don't know.

The UK listed Private Equity vehicles might give you some feel for performance. However if you are a US taxpayer you must not invest in them, due to PFIC rules. Perhaps there are quoted equivalents in the US market? Read the prospectuses & 10k's?

If you have access to Bloomberg, I believe there is data there (I know there is, at a fund level). Otherwise surf around until you find some industry league tables and see if you can get access to those eg via your university alumni library card (it might just be the business school, though).

BTW the industry has a long and distinguished history of stretching the truth on its performance numbers.
Valuethinker
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Re: inflows to private equity

Post by Valuethinker »

JackoC wrote: Fri May 27, 2022 9:01 am

It can be difficult to determine the actual illiquidity premium on offer. That IMO tends to come out as a disadvantage to PE funds practically: you know for a fact you pay more in expenses, but there's uncertainty how much real illiquidity premium will derive from the underlying assets. However it doesn't mean illiquidity premium doesn't exist and that public equity is the 'super asset' among risk assets rendering all others worthless.
To some extent what was public equity is now taken up by High Yield and unlisted debt.

Agree there is an illiquidity premium "factor". It would be assuming irrational markets to believe there was not.

However "lending liquidity" has been a real thing among institutional investors the last 10+ years. It's quite likely that the returns from that factor are dampened down (given the scale of money flows into private assets). And that they are cyclical.

Very hard for an investor (let alone an individual one) to get a read on this.

One venture capitalist we used to visit had a roulette wheel in the middle of their boardroom table. I thought it set the wrong tone, but there was a degree of truth to it.
bagastuff
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Re: inflows to private equity

Post by bagastuff »

I bought a small amount of BX stock the other day on a lark (and due to Ruth Porat buying it) and since then it's ripped up almost 20%. I take it that the stock price goes up when people entrust more money to Blackstone, rather than based on the actual returns of its funds.
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