Letter to the Investment Committee on Private Equity (Ben Inker)

Private equity risk: Inker and Pease argue the real danger isn't illiquidity but solvency: 45 years of LBO data show buyout targets are overwhelmingly small/microcap, and over the past decade more levered, less profitable, and more expensively priced than size-peers. On their quality composite, public-to-private LBOs rank below small caps, which are already far junkier than the S&P 500. Software concentration: Software accounts for roughly 40% of recent public-to-private LBOs, the most concentrated industry bet in buyout history, versus 5% or less in small-cap indices and 10% in the S&P 500. GMO: "the story in 2026, as you are well aware, is that the AI world will eat software." Venture and private credit compound the same exposure, so endowment-style portfolios carry more of this risk than buyout data alone implies. Hedging the bias: Pairing PE with passive public equity only avoids doubling up; Inker prefers actively countering it — long large, high-quality, short smaller, low-quality stocks (GMO's Quality Spectrum Strategy is 175% long/75% short) rather than a long-mega/short-Russell 2000 index hedge with heavy collateral swings. Manager selection: Inker sees little post-2000 performance persistence in buyout funds (more in VC); interim fund performance doesn't predict the next fund. "Paying high fees to managers you have less confidence in is unlikely to be a good use of capital." He questions fixed PE allocation targets, suggesting an upper limit instead. Bottom line: Inker isn't dismissing private equity, but views today's PE portfolios as a leveraged, low-quality, software-concentrated bet whose factor risks allocators should deliberately offset in their public books — and whose manager alpha he doubts is reliably repeatable.