Edward Conard

Top Ten New York Times Bestselling Author

  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, February 19, 2021

AI Summary. Analysis of private equity fund returns finds no evidence of performance persistence among buyout funds in more recent periods, undercutting the strategy of investing in previously top-quartile funds, while venture capital funds show strong persistence, with above-median firms consistently outperforming the S&P.

Robert Harris, Tim Jenkinson, Steven Kaplan and Ruediger Stucke National Bureau of Economic Research
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Analysis of private equity fund performance reveals a divergence in persistence btw buyout & venture capital funds. @RobertHarris @TimJenkinson @StevenKaplan @RuedigerStucke, @nberpubs

Do top-performing private equity funds keep outperforming?

Core argument: Post-2000 buyout fund data shows no evidence of performance persistence, challenging the conventional strategy of committing capital to firms whose prior funds ranked in the top quartile.

Analysis of private equity fund performance reveals a divergence in persistence between buyout and venture capital (VC) funds. For buyout funds, post-2000 data shows no evidence of persistence, challenging the conventional strategy of investing in previously top quartile funds. In contrast, VC funds demonstrate strong persistence, with firms above the median consistently outperforming the S&P. This suggests that while profits in buyout funds may be eroded by competition, the scarcity of high-quality investment opportunities allows top VC funds to maintain a comparative advantage through network effects.

Takeaways by Macro Roundup® AI

  1. Post-2000 buyout fund data shows no evidence of performance persistence, challenging the conventional strategy of committing capital to firms whose prior funds ranked in the top quartile.
  2. Venture capital funds display strong persistence, with firms performing above the median continuing to outperform the S&P across subsequent funds.
  3. The divergence is attributed to competition eroding profits in buyout funds, while scarcity of high-quality investment opportunities may let top venture capital firms sustain a comparative advantage through network effects.

Robert Harris, Tim Jenkinson, Steven Kaplan and Ruediger Stucke, "Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds," National Bureau Of Economic Research, https://www.nber.org/papers/w28109

He looks at previous fund performance at the time of fundraising and finds no evidence of persistence for buyouts, "...For post-2000 buyouts, the conventional wisdom to invest in previously top quartile funds does not hold...."Interestingly venture capital persistence remains strong, in fact firms above median are outperforming S&P. Perhaps profits in buyout funds are being competed away, but because of the scarcity of high quality investment opportunities top VC remain a comparative advantage/network effect.

Ed, Just an FYI we had looked at an earlier version of this Kaplan paper but it was recently revised.

Ed Comment:“…We use average returns to vc funds to show that returns to risk-taking are not so great…”

This factoid is notable, “…It is worth noting that VC funds in the 2nd quartile also have PMEs above 1.0, overall and for both pre-2001 and post-2000 vintages. This goes against the conventional wisdom that only the top quartile or top decile VC funds outperform public markets….”

Core findings, "...We present new evidence on the persistence of U.S. private equity (buyout and venture capital) funds using cash-flow data sourced from Burgiss’s large sample of institutional investors. Previous research, studying largely pre-2000 data, finds strong persistence for both buyout and venture capital (VC) firms. Using ex post or most recent fund performance (as of June 2019), we confirm the previous findings on persistence overall as well as for pre-2001 and post-2000 funds. However, when we look at the information an investor would actually have - previous fund performance at the time of fundraising rather than final performance - we find little or no evidence of persistence for buyouts, both overall and post-2000. For post-2000 buyouts, the conventional wisdom to invest in previously top quartile funds does not hold. Using previous fund PME at fundraising, we find modest persistence, but it is driven by bottom, not top quartile performance. On the other hand, persistence for VC funds persists even when using information available at the time of fundraising. Therefore, the conventional wisdom of investors holds for VC...."
Some implication for investors in buyout funds, "...First, little buyout fund persistence combined with a continuation of above public market returns for buyout is consistent with at least two explanations. It is possible that the buyout business has changed, with operating engineering becoming increasingly important...Some general partners adjusted while others did not. Alternatively, it is possible that general partners learned from each other and that has led to the lack of persistence.Second, our persistence results in U.S. buyout funds casts doubt on the industry rule of thumb to invest only in funds that were previously in the top quartile. To the extent buyout investors use past performance, they should focus on previous fund PME, rather than previous fund quartile, and should avoid bottom quartile performers. Third, the lack of a performance-size relation suggests that buyout funds have been able to scale their performance as they have become larger. PMEs in the post-2000 period are not appreciably different from those in the earlier period despite larger fund sizes….”

Some implication for investors in VC funds, he actually finds that VC funds above median outperform S&P, "....Our results on VC funds have two implications. First, the persistence of persistence in VC suggests that the industry rule of thumb to invest with GPs that have previously performed well and to avoid those that have not remains consistent with our results. The stronger performance persistence for VC as compared to buyout suggests that GP skills and networks for successful VC investing are harder to replicate than is true in buyout. At the same time however, VC funds with previous performance in both the top and second quartiles outperform the S&P 500. This is not consistent with the view that only very few VC funds outperform. In fact, previous funds that are above median appear to do so...."

Monday, February 22, 2021

AI Summary. Scientific integrity is undermined when standards are lowered to project certainty, producing misinformation and public distrust, as when politicized fields let cultural imperatives override empirical evidence. Examples include psychiatric diagnostic changes that reflect societal shifts rather than scientific advances, and claims that smoking burdens public finances despite smokers incurring lower long-term healthcare costs.

J. Peder Zane Wall Street Journal
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Science is the search for truth, which is often elusive. When we lower our standards to pretend we know what we don’t know, we diminish the work and misinform society.

Does lowering scientific standards to project certainty erode public trust?

Core argument: Lowering scientific standards to feign certainty produces misinformation and erodes public trust in science, an argument that science needs criticism rather than cheerleading.

The integrity of science is compromised when standards are lowered to feign certainty, leading to misinformation and public distrust. This is evident in the politicization of scientific fields, where cultural imperatives often overshadow empirical evidence. For instance, changes in psychiatric diagnoses reflect societal shifts rather than scientific breakthroughs. Similarly, the economic implications of smoking have been misrepresented; despite claims, smoking does not burden public finances as smokers incur fewer long-term healthcare costs. Such misrepresentations highlight the need for rigorous scientific inquiry to ensure that policy decisions are data-driven and not swayed by prevailing cultural narratives.

Takeaways by Macro Roundup® AI

  1. Lowering scientific standards to feign certainty produces misinformation and erodes public trust in science, an argument that science needs criticism rather than cheerleading.
  2. Changes in psychiatric diagnoses reflect societal shifts rather than scientific breakthroughs, an example of cultural imperatives overshadowing empirical evidence in politicized fields.
  3. Claims that smoking burdens public finances are misrepresented, as smokers incur fewer long-term healthcare costs, supporting the case for data-driven policy over prevailing cultural narratives.

The case for science, "...When Prof. John Staddon read the “Statement to the Community Regarding Anti-Racism” sent out by Duke University’s president this summer, he was alarmed. The president, Vincent Price, promised to require “anti-racism and anti-bias training for every member of our faculty, student body, and staff.” To Mr. Staddon, that sounded more like indoctrination than academic inquiry. He responded in an open letter.....Mr. Staddon is especially troubled by the concept of “implicit bias,” which holds that unconsciously held beliefs about social groups perpetuate racism, so that “basically, we are racist no matter what we do or even think.”......In a forthcoming book, “Fact vs. Passion: Science in the Age of Unreason,” he writes that “many social scientists have difficulty separating facts from faith, reality from the way they would like things to be.....The politicization of science, he says, isn’t limited to race. Not long ago, Mr. Staddon notes, “homosexuality and gender dysphoria were regarded as symptoms of mental illness. Not that I disapprove, the change just shows how supposedly scientific psychiatric diagnoses are often subordinate to cultural imperatives.”.....My personal tipping point” regarding the uses and misuse of science occurred some two decades later, “when I found out that despite massive publicity to the contrary, smoking has no public cost.” His 2014 book, “Unlucky Strike: Private Health and the Science, Law and Politics of Smoking,” argued that smoking saves society money on balance because the old need more resources than the young and smokers die more quickly and cheaply than nonsmokers. Smoking “puts individual smokers at risk. It does not put the public purse at risk......the corruption of science comes with its own costs: “Many people know these things. Those who don’t are made unnecessarily fearful, and those who do come to distrust medical science. Until we can identify the exact physiological and biochemical causes of these afflictions, until we know who is at risk and who is not, the medico-political establishment should stay quiet, or at least rein in its nanny instincts.” Mr. Staddon says they are, in the best sense of the word: “Science is the search for truth, which is often elusive. When we lower our standards to pretend we know what we don’t know, we diminish the work and misinform society.”..."

J. Peder Zane, "Science Needs Criticism, Not Cheerleading,"Wall Street Journal, February 19, 2021, https://www.wsj.com/articles/science-needs-criticism-not-cheerleading-11613772365