What Barbarians Like to Take Private (Ben Inker and John Pease)

Inker and Pease argued that private equity portfolios have become dangerously concentrated in low-quality, highly leveraged software companies—a bet that differs sharply from public equity indices and exposes allocators to correlated downside risk if AI disrupts the software industry or economic conditions deteriorate. Analyzing 700 leveraged buyouts from 1981 to 2025, the authors found that PE targets rank a full quality decile below small caps on profitability, leverage, and earnings stability. Over the past decade, public-to-private LBOs have skewed 40% toward software—the highest industry concentration in buyout history—while small-cap indices hold only 5% in software and the S&P 500 holds 10%. These software companies were purchased at high valuations and depend on low interest rates and robust growth to service their debt. A technological shift enabling competitors to launch at lower cost or allowing clients to build custom software cheaply could erode value substantially, even if other financial assumptions hold. Inker recommended that institutions with significant PE exposure actively hedge by running their public equity portfolio to counter PE's small-cap and low-quality bias. Rather than passive index hedges, he advocated for long large-cap high-quality stocks paired with short positions in smaller, lower-quality names—a strategy GMO's Quality Spectrum Strategy has employed since 2019 to keep pace with equity markets while protecting capital during downturns. In a separate letter, Inker cautioned that performance persistence among PE managers has deteriorated sharply since 2000, meaning even well-resourced institutions cannot reliably identify top-quartile managers. Academic research shows interim fund performance is unhelpful in predicting future returns. If persistence has truly eroded, aggregate PE portfolio returns will cluster near the median regardless of manager selection skill, undermining the case for large PE allocations predicated on alpha generation.