Podcast Summary

How I Invest with David Weisburd

Episode: E246: Private Equity in 2025: Fees, Rates, and the Law of Large Numbers
Date: November 20, 2025
Guest: Senior leader at FEG Investment Advisors (identity presumed to be Nolan, based on context)

Episode Overview

This episode explores the evolving landscape of institutional investment, with particular focus on private equity in 2025. David Weisburd hosts a candid conversation with a senior FEG Investment Advisors executive about the OCIO model, the growth in private markets, structural shifts in private equity buyouts, and the enduring tension between risk management and return-seeking. The discussion dives deep into how industry dynamics, regulation, fee structures, and behavioral finance influence decision-making for large pools of capital.

Key Discussion Points & Insights

1. Growth & Dynamics in the Investment Advisory Space

• FEG's Evolution: FEG now advises on over $95B, with more than 300 clients (90%+ nonprofits). Its OCIO (Outsourced Chief Investment Officer) business makes up $18B of that ([00:05]).
• Growth Catalysts: The shift from traditional consulting to OCIO, industry maturity, consolidation, and convergence of private wealth and institutional consulting have fueled growth ([00:39]).
• Selection Criteria for Advisors: Importance of understanding unique enterprise needs, organizational fit, enduring firm structure, and alignment of advisor expertise ([01:29]).

2. OCIO Critiques and Institutional Risk Appetite

• OCIO models are sometimes criticized for being overly conservative to “not get fired.” This is partially inherent in their incentive structure, but can be mitigated by aligning staff incentives with performance, fostering a culture that actively seeks alpha, and not defaulting to passive or benchmark-hugging investments ([02:13]).
• Quote:

  “People respond to incentives… having incentive structures … aligned to performance … should help drive superior returns or at least the ability to try to get there.” (B, [02:49])

3. Interval Funds—Liquidity Risks and Structural Compromises

• Pros & Cons: Interval funds offer the "easy button" for investors who want private credit/PE exposure without capital calls, but asset/liability mismatches and embedded lower-return/liquid assets can create structural risks ([04:20]).
• Liquidity Limitations: Under normal market conditions, ~75–80% of investors can get their money out in a given quarter, but liquidity evaporates during crises, sometimes for years ([06:13], [07:12]).
• Quote:

  “It’s the classic Hotel California … you can never get out. And there’s an asset liability mismatch.” (B, [04:38])
  “They work 75, 80% of the time and then once a decade there’s a run on the bank and they get horribly illiquid…” (B, [06:13])

4. State of Large Buyouts in Private Equity: 2025 Update

• Market Saturation: Significant influx of capital, higher multiples paid, increased competition, persistent high fees (still “2 and 20”), making outperformance harder ([07:59], [09:35]).
• Interest Rates: Higher rates directly reduce equity returns in leveraged buyouts. Even if rates fall, amount of capital and high purchase prices remain headwinds ([11:18]).

Notable Quote

“There’s no asset class that can’t be destroyed by too much capital coming in.” (B, [08:10])
“The law of large numbers just makes it hard to generate the same returns out of a $20B fund that they did out of a $2B fund...” (B, [10:16])

5. Middle and Lower Middle Market Buyouts: The Rationale

• LPs Shifting Down-Market: With large buyouts crowded, many LPs prefer lower middle market PE—more operational value-add, lower entry multiples, less leverage, and a broader exit universe ([13:09]).
• Risks: Smaller businesses are more fragile—greater customer concentration, less professionalized leadership, more vulnerable in economic downturns ([16:33]).

“We like the lower middle market... more ability to add value through operations... typically buying family-owned and founder-led businesses...” (B, [13:17])

6. Benchmarking and the Fama-French Factor Model

• The apparent alpha in small/mid-market PE is debatable. Fama-French models explain some (not all) excess return as compensation for smaller size, higher risk.
• Public small cap value has lagged for a decade, while private lower-middle market buyouts have done well; not all public market risk factors translate ([18:11]).
• Quote:

  “If you could replicate the return stream with less fees and more liquidity, you should… There’s no points for difficulty.” (B, [18:14])

7. Public vs. Private Universe / Adverse Selection in Small Cap Public Equities

• Fewer public companies, more companies staying private, tougher regulatory burdens—public small caps now often "fallen angels" or lower quality ([20:27]).
• Massive untapped universe still exists privately: ~200,000 US companies with $10M+ revenue vs. 3,500 public stocks.

8. The Wave of Private Assets into Retirement Plans

• New regulations and distribution channels (e.g., 401k plans accessing private assets) will push even more capital toward alternatives, likely raising asset prices and eroding the “illiquidity premium” ([22:39]–[25:10]).
• Quote:

  “I can't imagine the dynamics will stay the same... That should push up asset prices, so that's going to make it harder to generate the types of returns that you would want.” (B, [23:13])

• The “illiquidity premium” may be disappearing as market structures innovate, and new liquidity mechanisms spring up ([25:10]).

9. Contrarian Strategies and Sector “Rolling Droughts”

• Investors should expect lower average returns, but can still outperform by exploiting temporarily out-of-favor sectors or “narrative violations”—areas markets have ignored or currently dislike ([26:40], [28:31]).

10. Timeless Principles of Portfolio Construction

• Start with Risk: Focus on four risk pillars: financial goals, market risk tolerance, illiquidity budget, and “maverick risk” (willingness to deviate from peers/benchmarks) ([29:42], [32:21]).
• Quote:

  “First principles for us are start with risk, not return…” (B, [29:42]) “The best strategy is the one you can stick with over the long run.” (B, [30:17])

• Behavioral Finance: Many overestimate their risk tolerance/maverick risk—and must “practice” for crisis moments before they happen ([33:19]).

11. Best Practices During Market Crisis

• Preparation Matters: Set clear guidelines and mental models before crises. Stick to disciplined investment processes (e.g., tracking valuations, fundamentals, sentiment) ([40:24], [41:54]).
• Incrementalism: Lean in, but recognize the impossibility of perfect timing; buy systematically and adjust based on fundamentals, not just price moves ([42:54], [43:29]).

  “Market timing is a sin, and you should sin a little...” (B, referencing Cliff Asness, [40:57])

12. Perspectives on Policy, Politics, and Markets

• Political Incentives: US market cycles often synchronized with election cycles, as incumbents want high markets ([45:47]).
• Politicians may covertly (or overtly) create policy floors for markets—consistent pullbacks, then recoveries. Structural risk of major policy mistakes (“world can only end once”) remains ([54:10], [54:53]).
• Quote:

  “You can always count on Americans to do the right thing after they try everything else first.” (B, [52:53], quoting Churchill)

13. Timeless Advice for Investors & Professionals

• Don’t Fight the Fed: Interest rates are to asset prices what gravity is to the apple; macro trends matter ([47:41], [48:36]).
• Relationships Matter: Success in investing is accelerated by genuine relationship-building, sharing knowledge, and “always be connecting the dots” ([55:04]).
• Quote:

  “You can speed up your learning curve... by building relationships. You just expedite that growth curve 10x, 100x...” (B, [55:16])
  “Try to be a good partner, a good actor in the community... it’s a small world at the end of the day...” (B, [55:26])

Notable Quotes & Memorable Moments

• On OCIO:

  "You're never going to be bottom quartile, but you're never going to be top quartile." (B, [02:43])

• On Interval Funds:

  “It’s the classic Hotel California… you can never get out.” (B, [04:38])

• On Large Buyouts:

  “There’s no asset class that can’t be destroyed by too much capital coming in.” (B, [08:10])

• On Lower Middle Market PE:

  “We like the lower middle market. If you look at the dry powder... 80% is in funds $5B or more.” (B, [13:17])

• On Risk:

  “The best strategy is the one you can stick with over the long run.” (B, [30:17]) “Everyone has a plan until they get punched in the face.” (B, quoting Mike Tyson, [33:19])

• On Behavioral Investing:

  “Behavioral economics is just as, if not more important, than the true fundamentals…” (B, [35:19])

• On Market Cycles:

  “Markets also trend… you can take any good idea too far. Markets also trend, whether it's stock prices or the fundamentals of a business.” (B, [50:39])

• On Building Relationships:

  “Try to be a good partner, a good actor in the community. It's a small world at the end of the day in the investing community.” (B, [55:26])

• Favorite Churchill Quote:

  “You can always count on Americans to do the right thing after they try everything else first.” (B, [52:53])

• Closing Advice:

  “Don’t fight the Fed… Relationships are essential in this business.” (B, [47:41])

Timestamps for Major Segments

• [00:05] FEG snapshot and industry growth
• [01:29] How to choose a great investment advisor
• [02:13] OCIO conservatism and incentive structures
• [03:59] Interval funds: structure and risks
• [07:59] State of large buyouts in 2025
• [13:09] Middle market/private equity thesis
• [18:11] Factor models and public/private alpha
• [22:39] 401k/private asset democratization
• [25:10] The vanishing illiquidity premium
• [26:40] Rolling droughts, narrative violations, alpha hunting
• [29:42] Portfolio construction: first principles
• [33:19] Behavioral risk and portfolio reactions
• [40:24] Best practices during crisis: process over panic
• [45:47] Politics, policy, and market cycles
• [47:41] Timeless advice: don’t fight the Fed; relationships matter
• [55:04] Relationship alpha for CIOs and professionals

Bottom Line Takeaways

• Private equity is facing headwinds from excess capital, high fees, and rising rates. Median large buyout funds are unlikely to outperform public markets going forward.
• Lower middle market PE is a refuge, offering more alpha potential via operational improvements and less leverage—but comes with unique, higher business risks.
• Expect further asset repricing as trillions in retirement assets move to alternatives; illiquidity premium is fading.
• Behavioral discipline, clear risk budgeting, and a robust crisis playbook are critical for long-term investors.
• Fundamentals, not narratives, ultimately matter—but narratives present rare, time-bound alpha opportunities.
• Personal and professional relationships accelerate insight, manager access, and learning.
• Never forget macro forces (especially central banks) and the persistent, cyclical influence of policy and politics.