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The man you must never mention in a private equity interview

It's not easy to get an interview with a private equity firm. If you do, you probably don't want to commit the cardinal sin of "failing to think like a buyer" during the case study interview. You also don't want to mention the name of Oxford University professor of financial economics Ludovic Phalippou.

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If you speak Phalippou's name, your interview may be over.

Phalippou has been a thorn in the side of private equity firms for 15 years. His fundamental claim, articulated in his 2019 paper, 'An Inconvenient Fact: Private Equity Returns & The Billionaire Factory', is that the private equity industry doesn't generate returns higher than investments in index funds. 

While investors in private equity get little for locking their money up, Phalippou says a handful of elite private equity employees do very well indeed. Funds pay out hundreds of billions in carried interest, which is subject to capital gains tax rather than income tax. Thanks to carried interest, Phalippou said the number of multi-billionaires working in private equity went from three in 2003 to 22 in 2020. 

As private equity firms struggle to exit their investments, Phalippou's criticisms are hitting home. The Toronto Globe and Mail published an article last month noting that the Canada Pension Plan Fund (CPP), which is heavily invested in assets like private equity, real estate and infrastructure, generated an 8% return last year, while its "reference portfolio," a composite of global equity and bond indexes, gained 19.9%. As CPP has pushed into esoteric investments, The Globe and Mail observed that its headcount has exploded, increasing from 150 people in 2006 to over 1,200 in 2024. Pay has rocketed, too. The five highest-paid executives at CPP now receive compensation averaging nearly $4m a year, almost five times as much as in 2006. Pay for everyone else averages more than $500k per head. 

It looks a lot like overpaid private equity professionals are being rewarded for sub-par returns, and Phalippou isn't the only person to have noticed. 

It's ironic, but probably not surprising then, that many of Phalippou's students want to work in private equity. He estimates that around 100 of his students a year go into the industry. In 2021, Phalippou said he was "bombarded" with emails from students trying to get private equity jobs, and that he taught them "cynicism." He tells us that doesn't discourage his students from going into private equity: the jobs are exciting and highly paid, but the competition is harsh, the hours are long, and you're among highly intelligent people who care about money above all else. "It needs to fit your mindset."

While Phalippou is charitable to the industry he's built a career criticizing, private equity firms are less open towards students who repeat his ideas.  One former student told Phalippou that his private equity interview came to a sorry end when he repeated Phalippou's argument that the internal rate of return (IRR) isn't a good measure of an investment's success because it's open to manipulation and distortion. "I always tell my students. Do not ever drop my name in a job interview. You will be sent home almost every time," he observes.

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AUTHORSarah Butcher Global Editor

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