When David Swenson published the "Yale Model," many institutions tried to copy it without possessing Yale's resources, network, or manager selection expertise. This led many to chase private equity and hedge funds ill-equipped, resulting in them backing lower-quartile managers and achieving poor results.

Historically, private equity was pursued for its potential outperformance (alpha). Today, with shrinking public markets, its main value is providing diversification and access to a growing universe of private companies that are no longer available on public exchanges. This makes it a core portfolio completion tool.

Public pensions may invest in private assets not only for potential outperformance but to avoid the daily mark-to-market volatility of public markets. This 'volatility washing' creates an illusion of stability that may not reflect the true economic risks of the underlying assets, serving as a poor reason to invest.

Private equity's low reported correlation with public markets is largely an illusion created by smoothed, infrequent valuations ("volatility laundering"). The effect is exaggerated when institutions report private asset returns with a one-quarter lag, creating "accounting diversification" instead of real risk reduction.

David Swenson's endowment model has two parts: diversified market exposure (beta) and manager outperformance (alpha). While wealth advisors can easily replicate the beta part using low-cost ETFs, they lack the institutional resources to consistently select top-quartile managers who generate true alpha.

As top startups delay IPOs indefinitely, institutional portfolios are seeing their venture allocations morph into significant, illiquid growth equity holdings. These "private forever" companies are great businesses but create a portfolio construction problem, tying up capital that would otherwise be recycled into new venture funds.

Investors are drawn to PE's smooth, bond-like volatility reporting. However, the underlying assets are small, highly indebted companies, which are inherently much riskier than public equities. This mismatch between perceived risk (low) and actual risk (high) creates a major portfolio allocation error.

While limited partners in venture funds often claim to seek differentiated strategies, in reality, they prefer minor deviations from established models. They want the comfort of the familiar with a slight "alpha" twist, making it difficult for managers with genuinely unconventional approaches to raise institutional capital.

Harvard's John Coates reveals that 'private' equity funds primarily invest public money from pensions and endowments. The 'private' label is a brilliant marketing strategy that allows them to avoid the public disclosure and scrutiny that should accompany managing millions of workers' savings.