Private Equity Experience

Don’t Count Your Dollars Yet! The Truth About PE Valuations

• Emily Sander • Season 1 • Episode 35

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0:00 | 39:01

Is the "Crazy Math" of private markets masking the truth about your investments?

In this episode of the Private Equity Experience Podcast, hosts Rory Leaphart, Ed Barton, and Emily Sander break down a recent Wall Street Journal article titled "The Crazy Math Confronting Everyday Investors in Private Markets." If you’ve ever wondered how private equity and private credit funds actually value their portfolios and whether those numbers are real or just subjective "engineering," this episode is your backstage pass.

What we cover in this episode:

  • Private Credit vs. Private Equity: The fundamental differences between lending assets and ownership stakes.
  • The "Squishy" Valuation Game: Why private equity valuations are like Olympic figure skating scores: highly subjective, beautifully modeled, and sometimes massaged to protect management fees.
  • Impairments & "Loss Harvesting": How managers strategically offset massive home runs by dumping underperforming assets at the exact right time.
  • Non-Traditional Structures: The truth about escalators, profit participations, and structured notes that traditional banks won't touch.
  • Sound Smart in Your Next Meeting: The exact questions to ask your fund managers to find out if their deck is based on fundamental analysis or GAAP accounting.

Takeaway: Don't count your dollars before they hit the bank! In a volatile market, your portfolio values might swing by 20% or more. Proceed with caution.

If you enjoyed this deep dive, make sure to LIKE, SHARE, and SUBSCRIBE wherever you get your podcasts!

Got questions about your private market investments? Drop a comment below or hit up Ed and Rory!

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Who Are We?

Three insiders. One mic. All things private equity — explained. Hi 👋 We’re Ed, Rory, and Emily — a CEO, a CFO, and a Chief of Staff — here to demystify the world of private equity. Between us, we’ve sat in the founder’s chair, run PE‑backed companies, and worked on the deal side, so we know the wins, the pitfalls, and the jargon (and we’ll explain it).

Through the Private Equity Experience Podcast, our book On‑Ramp to Exit, and a library of free tools and templates, we share real‑world stories, practical strategies, and insider insights to help you navigate every stage of the PE journey — whether you’re leading a portfolio company, joining a deal team, considering PE, or just PE‑curious.

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Podcast Intro and Banter

Welcome to the Private Equity Experience Podcast. Your backstage pass to the strategies, stories, and secrets that drive value in the PE universe. No filters, no fluff, just straight talk and expert insights to help you navigate the private equity world with confidence. And now your hosts, ed Barton, Rory Leaphart, and Emily Sander.

rory-liebhart_1_05-15-2026_130604

Yeah.

emily-sander_1_05-15-2026_130603

like your necklace by the way, dude. Is that like a, is

rory-liebhart_1_05-15-2026_130604

Thanks.

emily-sander_1_05-15-2026_130603

Etsy buy or...?

rory-liebhart_1_05-15-2026_130604

Actually, it is, as a matter of fact. Yes. Yep. It is an Etsy buy. Spot on, actually. Yeah. Yeah.

emily-sander_1_05-15-2026_130603

Yeah.

rory-liebhart_1_05-15-2026_130604

Yeah.

emily-sander_1_05-15-2026_130603

No, I love

rory-liebhart_1_05-15-2026_130604

Thanks. Yeah. Yeah.

emily-sander_1_05-15-2026_130603

Very cool. Okay.

WSJ Crazy Math Explained

emily-sander_1_05-15-2026_130603

Big Riggs, manly Etsy necklace man, um, you came up with the Wall Street Journal article that, uh, I could not read 'cause I'm not fancy like you and subscribed to that, but it, the title was Crazy Math.

rory-liebhart_1_05-15-2026_130604

it was,

emily-sander_1_05-15-2026_130603

And so what, what,

rory-liebhart_1_05-15-2026_130604

Yeah.

emily-sander_1_05-15-2026_130603

what is this article about? What's it talking about?

rory-liebhart_1_05-15-2026_130604

it i- the, the article was a Wall Street Journal article published a couple weeks ago. It was called "The Crazy Math Confronting Everyday Investors in Private Markets." And these articles are clickbait in a lot of ways, which clicked me in, and I was baited and hooked to read it. And, uh, this one was actually about really bringing into context today how there's this perception that private credit, which is an asset class of its own, but different than private equity credit being, you know, debt financing versus equity being, you know, um, ownership, if you will, rather than lending to the, to the folks listening out there. Um, you know, there's been this, there's been a couple public- publicized stories where, you know, big investors in private credit funds have, um, you know, redeemed from the funds that they are in, and so the funds themselves are, you know, i- in some ways struggling with liquidity. Although, I think, I think the story's been overblown. But the point is that this article is saying, "Hey, um, private, private credit funds are having problems with investors leaving based on performance of their loan portfolios." So you have a couple bad loans go, or a couple loans go bad, investors say, "Oh, I don't want any one of-- I don't want any more of this asset class. I gotta get out of it." That's the perception. Um, they're comparing it to private equity, which is a different asset class for a variety of reasons. Um, and the, the, the thought that maybe that if there's performance issues within private, private equity funds, that maybe investors would get scared and, and run away too, which, you know, I don't think that's ever gonna happen en masse. But, um, one of the things that was brought up in this, and this is where, you know, we can kinda talk about some more esoteric elements, is that- Um, private credit funds, how they account for their portfolio is very different than private equity funds because, uh, a private credit fund is, uh, is making loans to middle market companies or other, other funds and things like that. And so their upside is capped, so they're basically accounting for losses, but they're not re- they can't really reap more gains than what their, their, their coupon is really, and, and some other small elements to that. Whereas private equity funds book gains on the acquisition of their portfolio companies. So there's some, there's some esoteric gain on purchase and sale, uh, math that goes into it, and how that plays out is, um, you know, some managers are incentivized based on fund performance, and fund performance is dictated by the way some of the accounting rules work. It's not just always just based on cash flow. So it just brought up a whole host of questions around, well, what is, how do, how, how is private, private equity account for performance of its portfolio? How does it mark that to market as it should be on a quarterly basis, yada, yada, yada. So it was kind of like a clickbaity story, but it made, uh, me think about, hey, maybe our listeners wanna know all about the ways in which the accounting for, um, acquisitions of companies and, and participations in companies, uh, is booked on the balance sheet and tested. Probably not, but maybe they are. Who knows?

emily-sander_1_05-15-2026_130603

I, I'm sure all two of the listeners left are intrigued by this, this topic. Um,

rory-liebhart_1_05-15-2026_130604

Yeah.

emily-sander_1_05-15-2026_130603

just to like for, for my refresher, uh, private credit is like the, the debt side. So

rory-liebhart_1_05-15-2026_130604

Yeah.

emily-sander_1_05-15-2026_130603

rattle off some common examples just so people...

rory-liebhart_1_05-15-2026_130604

Uh, as far as names go, like, uh, Blue Owl Capital, Castle Lake, and then you, you know, as we've, as Ed and I have mentioned before, like you have big firms that have both private equity and a private credit, uh, you know, call it, you know, business. So Blackstone would be an example of that, something like that. So big, big funds, billions and billions and billions of dollars.

emily-sander_1_05-15-2026_130603

What-- But what's like a... Okay.

Private Credit Basics and Liquidity

big-ed--big-ed-_1_05-15-2026_130603

Now your, your challenge here, as Rory kind of noted, is liquidity when it comes to private debt is a different animal than it is for private equity even. Because

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

you think about kind of the nature of debt, it's a fixed... normally a fixed term instrument that you're lending. And you're lending knowing the risk profile of that borrower is not bankable or

emily-sander_1_05-15-2026_130603

bankable.

big-ed--big-ed-_1_05-15-2026_130603

So, so no normal bank is gonna extend credit to that borrower. They're probably pre-profit. They're, they're... They may be pre-revenue. They have-- And so normally with these private credit, there's, there's structuring in the private credit instrument you know, potentially allows for warrants

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

or something which is an opportunity to buy equity when the company becomes successful. Or there's, you know, different escalators on repayment, or it's gonna be cashflow-driven repayment as opposed to a steady, you know, you pay back $10,000 a month plus interest. It's gonna be, you know, if your revenue is this, if you pay back this

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

revenue is less, you pay less, and if your revenue is more, you pay more. There's a structuring in those that allows what would otherwise be a non-creditworthy borrower to borrow the money, and the folks lending into that space are essentially, you know, again, they're looking for private equity type returns. Private credit is, is looking for similar returns to private equity because got a, a similar risk premium.

emily-sander_1_05-15-2026_130603

So for private credit, you're the

rory-liebhart_1_05-15-2026_130604

Yes.

emily-sander_1_05-15-2026_130603

and then just give me an example of like what type of loan I would-- like what type of loans are we talking about?

rory-liebhart_1_05-15-2026_130604

Uh, construction loan perhaps, or an infrastructure building loan. So just, just what Ed said is, like, it's not that sophist-- I mean, it's not that complicated in the sense that it's no different than taking out a personal loan, you know, for ten grand that you pay o- back over three, three years. In this case, it's like you're taking out, you know, tens of millions, hundreds of millions of dollars that you are agreeing to pay back principal and interest in, you know, five years, ten years.

big-ed--big-ed-_1_05-15-2026_130603

So, and let me get, let me, let me give a real-life example Rory and I

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

We dealt with the old RBS Greenwich Capital back 20 years

rory-liebhart_1_05-15-2026_130604

Yeah. Yeah.

big-ed--big-ed-_1_05-15-2026_130603

and the deal that we had with RBS Greenwich was essentially they let us borrow to buy big portfolios of bankrupt consumer debt. They would lend us, on the first deal we did with them, 95% of the purchase

rory-liebhart_1_05-15-2026_130604

Yep. Yeah. Mm-hmm.

big-ed--big-ed-_1_05-15-2026_130603

And they said, "Okay, now you..." And then you'd get this little, what they call a servicing strip. So they would go, "You could get $10 per account to manage it." as cash flow comes in, we get all the cash flow except for a small amount to repay principal plus interest. And then once the loan's paid back, we get 80% of the cash flow after that. So that, that's

emily-sander_1_05-15-2026_130603

yeah.

big-ed--big-ed-_1_05-15-2026_130603

a classic private, kind of private credit experience where the, the structure of that note is done in such a way that no bank would ever do that. But RBS Greenwich Capital was kinda like their non-traditional-- Was RBS, Royal Bank of Scotland's non-traditional, non-traditional arm, and they made loans like that all the time

emily-sander_1_05-15-2026_130603

Okay, wait. I gotta back up 'cause my,

big-ed--big-ed-_1_05-15-2026_130603

Hmm?

emily-sander_1_05-15-2026_130603

um, So private credit, I'm a lender. This is a loan. And so the whole mechanism is kind of flipped from private equity. So y-y...

rory-liebhart_1_05-15-2026_130604

Yeah.

emily-sander_1_05-15-2026_130603

category. And then, so the way I earn money in private credit, you said, Rory, it was capped. Like, what are like the basic mechanics of like you, you give a loan and then you get the loan repaid

rory-liebhart_1_05-15-2026_130604

That's it. Yeah.

emily-sander_1_05-15-2026_130603

supp-supposed to be predictable and

rory-liebhart_1_05-15-2026_130604

Yeah. I mean, uh, y- that, that's the way to think about it. Now, of course, again, what Ed said is also true, is there's usually some sort of equity incentive or kicker, if you will, to that the lender is granted by-- for doing that loan. But by and large, that's

emily-sander_1_05-15-2026_130603

And this...

rory-liebhart_1_05-15-2026_130604

that's a whole 'nother... Just think about it this, the difference between that and private equity is like private equity wins when they buy a company low, do a bunch of stuff operationally and financially, and sell it high. The difference is their profit. Well, for a private credit fund, they just make money on that interest that they're charging.

emily-sander_1_05-15-2026_130603

Okay. Okay. So

rory-liebhart_1_05-15-2026_130604

Yeah.

emily-sander_1_05-15-2026_130603

a

rory-liebhart_1_05-15-2026_130604

Completely different category. Yeah.

emily-sander_1_05-15-2026_130603

this would be like kind of

rory-liebhart_1_05-15-2026_130604

Yeah. Y- yes. Yeah.

emily-sander_1_05-15-2026_130603

reluctantly,

rory-liebhart_1_05-15-2026_130604

yeah, I

emily-sander_1_05-15-2026_130603

Okay.

rory-liebhart_1_05-15-2026_130604

yes. Yeah. There's obviously, you know, lots of caveats to that. Of course, there's different gradations and grades of loans and, uh, ratings and things like that, um, that, you know, the highest quality private equity play could be, um, less risky than the lowest quality credit play. But yeah, I mean, that's the way to think about it.

emily-sander_1_05-15-2026_130603

So, so is it, um, these types of loans a normal bank wouldn't take 'cause they're too risky or just because they're structured in a kind of a way?

rory-liebhart_1_05-15-2026_130604

Yeah. Both, both are largely true. Yeah. Exactly.

big-ed--big-ed-_1_05-15-2026_130603

Now, the, the issue, as Rory was noting, is you've got-- these have two elements, and one of which is what's this loan carrying value? So how is it valued for an investment perspective? So is it

rory-liebhart_1_05-15-2026_130604

Yep.

big-ed--big-ed-_1_05-15-2026_130603

So is, e-essentially, are we gonna get our money back?

rory-liebhart_1_05-15-2026_130604

yeah. That's one way to think about it. Is it stumbling along? Yeah.

emily-sander_1_05-15-2026_130603

in a

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

Yeah. Is

rory-liebhart_1_05-15-2026_130604

Yes.

big-ed--big-ed-_1_05-15-2026_130603

A-and then the second piece is

emily-sander_1_05-15-2026_130603

Oh

rory-liebhart_1_05-15-2026_130604

Yeah.

emily-sander_1_05-15-2026_130603

my

big-ed--big-ed-_1_05-15-2026_130603

in the sense that in order to get the money out, you've got to

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

the company or you've got to sell your shares on a secondary. It's the same thing with private debt, where you essentially-- or private credit, where you, i-in order for you to be able to get your money out. So when somebody goes, "I want out of this fund," they-- you've got to be able to get that loan paid back by somebody, or you got to sell the loan to somebody.

rory-liebhart_1_05-15-2026_130604

Yep.

big-ed--big-ed-_1_05-15-2026_130603

Well, that's a different--

rory-liebhart_1_05-15-2026_130604

if you're selling a loan, it's not being sold at par either on something like that.

big-ed--big-ed-_1_05-15-2026_130603

It-- yeah, so

emily-sander_1_05-15-2026_130603

Now

big-ed--big-ed-_1_05-15-2026_130603

par value is like the actual face value of a loan.

emily-sander_1_05-15-2026_130603

hell? All right.

big-ed--big-ed-_1_05-15-2026_130603

Yeah, this is-- and, and what's funny is like Rory

emily-sander_1_05-15-2026_130603

drunk.

big-ed--big-ed-_1_05-15-2026_130603

Rory and I, we're both on the private l- uh,

emily-sander_1_05-15-2026_130603

know,

rory-liebhart_1_05-15-2026_130604

We did,

big-ed--big-ed-_1_05-15-2026_130603

credit, we've

rory-liebhart_1_05-15-2026_130604

yeah.

big-ed--big-ed-_1_05-15-2026_130603

private credit, and

emily-sander_1_05-15-2026_130603

That's, that's fantastic. But so, okay,

big-ed--big-ed-_1_05-15-2026_130603

so we, we might get geeking out and talk like words that no one

rory-liebhart_1_05-15-2026_130604

It's gonna

emily-sander_1_05-15-2026_130603

got it.

rory-liebhart_1_05-15-2026_130604

be a five-hour podcast. No, I was kidding.

emily-sander_1_05-15-2026_130603

got it.

Valuation Carry and PE Marking

emily-sander_1_05-15-2026_130603

What are you carrying? What's the carry? What is just, like, simple definition? Carry

rory-liebhart_1_05-15-2026_130604

It--

emily-sander_1_05-15-2026_130603

is...

rory-liebhart_1_05-15-2026_130604

the value of the asset. It's that, it's that simple.

emily-sander_1_05-15-2026_130603

And then impaired, impaired is

rory-liebhart_1_05-15-2026_130604

Yes.

big-ed--big-ed-_1_05-15-2026_130603

Yes. So

rory-liebhart_1_05-15-2026_130604

It's a really good segue, by the way.

big-ed--big-ed-_1_05-15-2026_130603

company a million dollars,

emily-sander_1_05-15-2026_130603

Yep.

big-ed--big-ed-_1_05-15-2026_130603

normally you would have that loan on your books, and you'd value that loan at a million dollars. But if you think that it's not gonna get paid back or it's delinquent or it's something, you, you impair that. You reduce the value to maybe $700,000.

rory-liebhart_1_05-15-2026_130604

by doing that, Emily and listeners, that difference between the prior carrying value and the new value that's impaired is basically take-- it's taken as a loss. So if you think about that, it goes from the balance sheet to the income statement. Now we're getting...

big-ed--big-ed-_1_05-15-2026_130603

And that

rory-liebhart_1_05-15-2026_130604

Yes.

emily-sander_1_05-15-2026_130603

Oh,

big-ed--big-ed-_1_05-15-2026_130603

as the, as the manager, it impacts my

rory-liebhart_1_05-15-2026_130604

Yep.

big-ed--big-ed-_1_05-15-2026_130603

on the assets under management because now those

rory-liebhart_1_05-15-2026_130604

Boom. That was a perfect segue there, Emily. Exactly. That's it. And so, so therein lies the, the interesting part, and that's-- we're just talking about private credit right there. It's, that's just, it's actually pretty simple. One thing that does need to be noted is that you're required to test these loans and these assets for impairment quarterly,

emily-sander_1_05-15-2026_130603

Oh.

rory-liebhart_1_05-15-2026_130604

right? So Ed and I, a-again, we worked at a company together where we built an entire system where we would literally test thousands of portfolios in an automated fashion every single... We did it monthly, actually, but we reported quarterly.

big-ed--big-ed-_1_05-15-2026_130603

Yep.

rory-liebhart_1_05-15-2026_130604

Uh, we did it monthly, and we would basically book a shitload of journal entries that were at the portfolio level, basically gains and loss On the portfolio and, and without getting too crazy into the GAAP accounting, because that's even-- it's, it's, it is very complex, but you can reverse losses. You can, you can take gains as well. It just hap... Yeah. So it's t- it's point in time, but the point is you're supposed to do it every quarter. And guess what? It's e- you know, with, with loans, it's pretty easy to determine what the, what the impairment is. Are you getting paid back on time? Yes, no. What's the magnitude of, of, of the miss? Then you basically impair it. Well, think about pr- well, transitioning that to private equity, which is the crux of this, this article, is to say, "Well, hey, that's all happening for private credit, and people are freaking out." Well, what about private equity? It's even more wild because private equity, what can happen is when a fund acquires an interest in a business, it puts it on its balance sheet as, um, puts it on its balance sheet. But in the process of that, there's all sorts of things that go into how much is put on the balance sheet. In other words, you can book the purchase price. You could, you could book the value of the asset at different value than what you actually paid for it. You basically can make the case that I got such a screaming deal. In a lot of cases, that's true for a private equity fund. It's, they're buying something that's got way more intrinsic value than what they paid for it, because maybe they bought it in distress. Maybe it's a perfectly good company that just ran out of cash and had no prospects for getting more cash. They're like, "Wait, this is a good business. We'll pick it up. We got the cash." But anyway, so the point is, you can do all of these, these, um, calculations about market value and things like that. It's kind of subjective, and you can put on your balance sheet a certain value. But guess what? You still have to do, uh, they call it mark-to-market, uh, impairment testing, if you will, and you do that quarterly as well. I think y- you can go for, like, a period of time before you actually do that, I want to say. But over, at a certain point in time, you're doing it regularly. So think about the fact that there's all sorts of subjective, uh, ways to look at a market of va- market value of a company, and so you can make a case for any number of things at even an inflated value. So you might be able to kind of surmise that there might be some moral hazard in that, where, you know, somebody that runs a fund might be incentivized to keep a value inflated for just a little while, uh, while we work this other portfolio company out so that they don't, as Ed said, lose that denominator from which their 2% asset management fees calculate off of and their profits interest that is, you know, uh, partially due to the actual book profitability of that fund. So it's way more complex, I, I would say, or I guess more subjective than Private credit, but s- so, you know, you c- people aren't running to the-- people aren't rushing to mark things down, let me just tell you that. Like, unless they've already sold the asset and they're getting some tax benefit from it. I don't know, but...

emily-sander_1_05-15-2026_130603

so it's kind of like they are figure skating of the Olympics, where like figure skaters are athletic, but they have these weird scores that are

rory-liebhart_1_05-15-2026_130604

I'm tracking. Yeah.

emily-sander_1_05-15-2026_130603

performance and like verve and what-- like what? Like, okay, the guy did a triple axel

rory-liebhart_1_05-15-2026_130604

Dude,

emily-sander_1_05-15-2026_130603

the costume, like I

rory-liebhart_1_05-15-2026_130604

yeah.

emily-sander_1_05-15-2026_130603

So

rory-liebhart_1_05-15-2026_130604

Imagine, um,

emily-sander_1_05-15-2026_130603

things

rory-liebhart_1_05-15-2026_130604

look at the,

emily-sander_1_05-15-2026_130603

on?

rory-liebhart_1_05-15-2026_130604

public equities markets, right? Where it's all transparent and you're actually-- you look at some of the p- price to earnings ratios, which figures into the price of the stock, right? And this is, this is published information public, and, like, these valuation ratios are, are nuts. Think about certain sectors that are crazy hot, AI, that kind of stuff. Like, there's no...

emily-sander_1_05-15-2026_130603

Aren't they

rory-liebhart_1_05-15-2026_130604

That's

Valuation Games and Incentives

rory-liebhart_1_05-15-2026_130604

what I'm saying. Like, it's, it's all relative. It can be relative. One can make a case of relativity on just about anything. We can say that this is a cyclical issue, that there's inherent, um, value in this business that's unrealized today. Uh, you can talk about it from a competitive standpoint, which is kind of like a competitive, like, mark on private companies, what transacted previously. You can put yourselves-- I've, I've been in companies that have done this. I've been, I've done these calculations where it's like, where's your company amongst its peers? Well, these are all private companies, so how do you put a value on your business and, you know, what have you? And so the point is there's, there's a lot of ways to, um, uh, how do I delicately put it without saying game things? But like, you, you can, you can engineer yourself out of taking big losses or you can engineer gains. But at some point, as we do all know, uh, you do-- private equity doesn't make for life. So like when you do sell the asset, let's say you kept it at a way inflated value and you sell it way down here, you do have to pay the piper at some point. But along the way, who's really incentivized to, you know, um, keep, keep things, um, marked to market in all cases objectively if you're talking about fee income being driven from that? That's

big-ed--big-ed-_1_05-15-2026_130603

Yeah.

rory-liebhart_1_05-15-2026_130604

a,

big-ed--big-ed-_1_05-15-2026_130603

I, what I would, what I would say is I have seen on-- in my private equity experience, when you have a home run hit, at that point, they might

rory-liebhart_1_05-15-2026_130604

reasonable question. Yeah.

big-ed--big-ed-_1_05-15-2026_130603

to

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

down to

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

of

rory-liebhart_1_05-15-2026_130604

Yeah.

emily-sander_1_05-15-2026_130603

Oh.

big-ed--big-ed-_1_05-15-2026_130603

kinda..." So

rory-liebhart_1_05-15-2026_130604

That's a

big-ed--big-ed-_1_05-15-2026_130603

maintain

rory-liebhart_1_05-15-2026_130604

call. Yeah.

big-ed--big-ed-_1_05-15-2026_130603

but we're

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

bringing that other valuation down as we realize a big value on something else so that it kinda

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

it a little bit and keeps the reported

emily-sander_1_05-15-2026_130603

like at

big-ed--big-ed-_1_05-15-2026_130603

return higher

emily-sander_1_05-15-2026_130603

when you kind of dump some

rory-liebhart_1_05-15-2026_130604

Loss harvesting. Yeah, exactly right. That's a great call.

big-ed--big-ed-_1_05-15-2026_130603

Yeah.

rory-liebhart_1_05-15-2026_130604

Yeah.

Why Marks Stay Subjective

emily-sander_1_05-15-2026_130603

Okay. So is this article saying there should be more of the impairment checks

rory-liebhart_1_05-15-2026_130604

more of an expository article in, in such form that like, it's just saying, "Hey, for all of you don't, that don't know about this, this, this happens." This-- You're, you're worried about private credit and people fleeing from the,

emily-sander_1_05-15-2026_130603

okay.

rory-liebhart_1_05-15-2026_130604

from the, the funds. Well, private equity is bigger and is even more, uh, squishy.

big-ed--big-ed-_1_05-15-2026_130603

Subjective.

rory-liebhart_1_05-15-2026_130604

Yeah. So if you're into certainty and things like that, then, you know, um, that's so- that's something to think about. It's more just an intellectual article. Like I said, clickbaity. I found it interesting, but, you know, I don't... This is, this is how it's always been, probably how it always will be, you know? So because if you-- I, I mean, how do you make the case the other way that like, there's a objective way to mark a private company to market based on m-myriad factors and that impact valuation in any day. These are not publicly traded, fully liquid securities, so how much of your value is liquidity based? How much of it is based on the fundamentals of the business? Things like that. How do you value a company that's just been part of a bunch of acquisitions that, like synergies? I think that's actually like one of the main, main, um, main, uh, like, uh, supports for certain valuation is like you create synergy, right? Like you bolt something onto another company. Well, those synergies will be realized over the next five years, and we're gonna factor that in here. You know, that kind of stuff, so.

emily-sander_1_05-15-2026_130603

You know, it'll be interesting to see how these financial folks are evaluated. Like, are you getting, getting good marks for like, "I can creatively craft this subjective thing," and then it's

rory-liebhart_1_05-15-2026_130604

That's an interesting question.

emily-sander_1_05-15-2026_130603

where it's good? Or like, "No, no, no, like you had the biggest gap in the world where you're doing and you're, you're

rory-liebhart_1_05-15-2026_130604

my guess would be CFOs can keep their jobs if they do it well enough. Um, uh, and don't, I don't wanna miscon- I don't wanna misconstrue the message here. All of this stuff is totally audited. So like, again, y-you're, you-- these are things that are modeled out. It's just that the variables are what's kind of somewhat subjective. Like you're not just making up, you're just not making up numbers generally. You're, you are creating a case for it because you will be audited, but the auditors will look at this stuff and say, "Okay, I can see the logic in it. Can I actually like prove it out?" Not necessarily, but that's not necessarily what the barometer is. It's like, is there supportive, uh, thinking behind this? And yeah, I mean, generally it is, yeah.

emily-sander_1_05-15-2026_130603

Does... Is this one of those things where it's like, "Everyone's doing

rory-liebhart_1_05-15-2026_130604

Kinda. I

emily-sander_1_05-15-2026_130603

doing

rory-liebhart_1_05-15-2026_130604

yeah. Yeah. I

emily-sander_1_05-15-2026_130603

Okay.

rory-liebhart_1_05-15-2026_130604

I would say that like, you know, um, I don't know that there's like a pervasive like direct, "Hey, what's the performance of this fund?" To our investors, are we hitting our 10% preferred return to our investors? If so, then, you know, we can be a little more conservative on the mark. If not, then we could be more aggressive. I don't think that's happening. I just think that there's just, you know, people put thought into how to, how to put it on the balance sheet originally based on the, uh, acquisition, and then they basically test it from there. And unless there's some major sea change reason to market-to-market, um, or like Ed said, you know, kind of since situations come up where there's like a home run where it's like, okay, you know, uh, we probably ought to, you know, sort of slow things down. Like, you know, it's just why are you gonna spend the time every quarter to do a comprehensive market valuation to justify whether your, you know, $100 million investment is appreciated or depreciated by 3% either way, you know? It's just not gonna happen.

emily-sander_1_05-15-2026_130603

Yeah, I'm kind of wondering, like, I remember it's different than accounting and balancing the books where you wanna be like penny perfect if you

rory-liebhart_1_05-15-2026_130604

it is, uh, this is an accounting, this is an accounting exercise 100%. Um, but, but finance fuels accounting in this case, or I should say, you know, financial planning and analysis fuels accounting. Um, the accountant is just booking the journal entry on it. The balance sheet still does balance, I promise you. Um, but the, the, you know, the, the, the analytical teams are the ones doing the work. Um, and like I said, I think quarter to quarter, not a lot changes unless you do have like, you know, maybe the, the, the operating company itself underlying that investment either buys and sells another, um, com- part of, you know, either divests parts of itself or acquires a, you know, ancillary business or something like that, which you would then record, so. Um, but I think, um, you know, this, like I said, I think this article is interesting just 'cause I think it might be an eye-opener for people that are intellectually curious about it. But I think, you know, anyone that invests in private equity understands private equity for what it is. It is a risk-based investment, more so than a credit investment for the most part. And so, you know, I don't think you're gonna see a lot of people fleeing for the, um, exits because of like some revelatory article in Wall Street Journal about how the accounting works. So at the end of the day, it's still really about cash. So, um, you know. But, but you know, maybe private equity fund managers kind of keep tabs on things so that the, you know, incentive fees and, and asset management fees are not out of whack quarter to quarter.

Private Credit and Real Estate Structures

emily-sander_1_05-15-2026_130603

Reputationally, like just, just like on the street, it's like, "Oh, like private credit is way more risky," or like, "Oh, private equity is like you're kind of rolling the dice

rory-liebhart_1_05-15-2026_130604

My, my impression talking to folks is people still don't really get private credit. They don't-- It's just, i- which is a funny thing because it's been so much more

emily-sander_1_05-15-2026_130603

They were like

rory-liebhart_1_05-15-2026_130604

Yeah. No, but now you're-- you, you took, you took, uh, you know, 22 minutes to, like, figure it out, and you're like, "Oh, yeah, I get it now." Like, um,

emily-sander_1_05-15-2026_130603

Yeah.

rory-liebhart_1_05-15-2026_130604

I think pe- but private credit, as Ed said, we've been doing deals in private credit for 20-plus years, and it's been a long far beyond be-before that. But, but people generally just look at these, this whole private equity or credit as just like this really scary alternative asset class that's like, you know, um, only the institutional investors plan. Which is funny because now this has never been more democratized for the masses than it is now. You, you know, as an individual, I can go participate in any private equity fund. Maybe not every fund, but, like, there's a lot of funds that are available to reta-retail. We're, we're retail investors, uh, let's, let's say. Um, it's available to everybody, and there's a lot of publicly traded private equity group companies that are large that you can, by buying the stock on the, you know, uh, Nasdaq or wherever it's traded, you're, you're, you have the same risk profile at that point. Maybe more liquidity with your own shares, but the underlying business is the same.

emily-sander_1_05-15-2026_130603

its own category or is that within one of...

rory-liebhart_1_05-15-2026_130604

it's... I don't know, Ed, what do you think on that? I, I'd be interested in your perspective there. Yeah.

big-ed--big-ed-_1_05-15-2026_130603

Yeah, it's in both. So real estate, it-- again, if it's private credit, there's generally gonna be a structuring difference between what you would get from a traditional commercial

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

you know, if you're doing a real estate development. Um, and that's generally gonna have either some level of escalator or graduated repayment or equity participation, along with it.

emily-sander_1_05-15-2026_130603

Explain those three

big-ed--big-ed-_1_05-15-2026_130603

So an escalator is gonna be you borrow money for the, uh, development, and for the first two years,

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

development or you're building an apartment complex, for the first two years it's interest only at a twelve percent rate. And then once the apartment building goes live, you start paying principal, and then your interest rate drops to eight percent or seven percent. And then at ten years, and it might be on a thirty-year amortization, and at ten years you have to refinance the whole thing. So it may be that's gonna have an escalator or a graduated payment structure. Or it may be that you go, "Okay, we've got..." You know, the, the real estate developer borrows ten million dollars to build this, to build this building, and they put up certain amount of money. And if the building sells within the first, you know, five years or ten years, that the-- not only does the, uh, loan get paid back, but there's

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

penalty or

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

which is effectively an

rory-liebhart_1_05-15-2026_130604

Yep. Yep.

big-ed--big-ed-_1_05-15-2026_130603

amount that says, okay-- or, or it's a profit participation amount that says, "Okay, if you really make a bunch of money and sell this thing, get-" You know, an additional, an additional

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

on it because you didn't hold-- you didn't keep our loan out long enough, which also slows down the

rory-liebhart_1_05-15-2026_130604

Yeah. That's very common

big-ed--big-ed-_1_05-15-2026_130603

it's gonna have some of those types of structures in there on real estate that you're not necessarily gonna see in a deal where they're... You know, like the one that Rory and I were involved in, where it was really a different type of collateralized asset, which was loan pools, or into an operating company. But they all-- anything in private credit is going to have some variation on a traditional loan theme you know, makes it not what a typical bank on Main Street is gonna, is gonna offer to anybody, or even a JPMorgan Chase. Although, like a JPMorgan Chase does have a, a

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

of specialty lending group that will do those types of, those types of loans, which is how we ended up with RBS, Greenwich Capital. Greenwich Capital is Royal Bank of Scotland's version of that.

emily-sander_1_05-15-2026_130603

But in theory, you could say, "I know where my money is going to be for the next 30 years and how the repayment schedule is gonna look like." And there's gonna ha- be some where they don't go to plan, but in some-- in a lot of ways, it's more predictable than like private equity, and we think this company is gonna grow to be the next Facebook and da, da, da,

big-ed--big-ed-_1_05-15-2026_130603

Yeah, but it's not a collateralized mortgage pool. It's not... I mean, it is a different risk profile with a different return profile because of the risk premium that's got to be built into that for illiquidity and for v-volatility. But it, it's sits somewhere between... And Rory described it earlier extremely well. Like, the best private equity is less risky than the worst private credit, and vice versa. You know? So it really should, all things being equal, if you look

rory-liebhart_1_05-15-2026_130604

Yep.

big-ed--big-ed-_1_05-15-2026_130603

stack, the private credit's gonna be ahead of the private equity on a capital stack in any given company. But it's really how is that pool assembled, because it's normally a fund of, and so there's multiple investments. How's that pool assembled? And that

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

credit a little bit less risky than private equity, but not always. And within that pool, you're gonna have, you know, riskier and less risky loans and riskier and less risky equity investments.

emily-sander_1_05-15-2026_130603

And you were mentioning, like, the, the grades earlier and there's different classes of things. Um, and then just to cover off on it, so what's the distinction for real estate? What would make it credit versus equity? You said they could be both.

big-ed--big-ed-_1_05-15-2026_130603

it's gonna have-- normally have some component in it that is not a traditional credit component. So a traditional credit component for a traditional mortgage on real estate is you borrow. The following month, you start repaying on an, on a amortization schedule that has essentially, for simpli-simplified, again, commercial is sometimes a little bit different, but basically has a level repayment a term of,

rory-liebhart_1_05-15-2026_130604

Mm-hmm. Yeah.

big-ed--big-ed-_1_05-15-2026_130603

A private credit instrument and real-- that's secured by real estate may be in a second or third position, so it may not have the first mortgage. It may be in a second or third mortgage position. It may have something that varies that re-- that amount based upon collected, based upon completion, based upon some other methodology. And it may also have a, if the, if the project is sold or refinanced within a certain amount of time, and the amount is in excess of X or Y, that we have a participation in that profit the sale of the, on the sale of the business or on the sale of the development as part of our

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

package.

rory-liebhart_1_05-15-2026_130604

I mean, I think on a practical basis, and this is just Rory speaking from Rory's perspective, I do look at real estate as a separate asset class in itself in the sense that the characteristics of what makes a real estate play successful or unsuccessful are, is different than investing in a private credit fund or like a, a, a, a credit strategy or an equity strategy. We were dealing with businesses and operating companies. That being said, like Ed, where I attach it all is to say, if I'm investing in real estate, I do wanna understand how leveraged that real estate fund is because that itself creates a different risk profile than something that's not leveraged. So more leverage, more risky, less leverage, less risky, basically, all things being equal. So I think the, the interesting thing about, um, real estate is that it is its own unique thing, but it, it's-- the level of performance and profitability dic- is dictated by, you know, kind of the level of debt and equity supporting that strategy, I guess. I mean, I, I guess you could say the same thing about any, you know, any business, but like, I don't know, it, it is its own unique thing. And the, the other thing I would say about real estate, since we're turning this into a real estate pod, which is great, uh, is that, you know, it's also, there's some s- very interesting tax strategies associated with that. So you can continue to flip properties and flip properties and flip properties on a 1031 exchange, which gives you significant tax benefits as well. Um, so it's, it's why it's generally offered as its own asset class and why we think about, like when we, we most, most individuals think about, "Hey, you know, I have my real estate, I have my home, like that's my own asset class," versus, "I also inves- I invest in the stock market too." People generally separate their investment holdings in like what properties they own and what like stocks and bonds they own. They don't really like think about it as one, one and the same, to make it simple.

Practical Takeaways and Wrap

emily-sander_1_05-15-2026_130603

So if people are-- have read this article or have listened to this episode and now know

rory-liebhart_1_05-15-2026_130604

Hit me up if you have any questions. Hit Ed up if you have any questions.

emily-sander_1_05-15-2026_130603

what, what, if anything, should they do with this information? Or is it

rory-liebhart_1_05-15-2026_130604

I don't know, just, just to

emily-sander_1_05-15-2026_130603

and have a fuller picture"?

rory-liebhart_1_05-15-2026_130604

add to that brain, you

big-ed--big-ed-_1_05-15-2026_130603

the

rory-liebhart_1_05-15-2026_130604

It's just one more kind of interesting piece of information to have. I don't know that there's anything really applicable unless you're like, uh, you know, running a, you know, endowment or, you know, um, you know, like a sovereign wealth fund and, like, want to think about whether to run for the streets be-because of, like, accounting rules. But, you know, I don't...

big-ed--big-ed-_1_05-15-2026_130603

I think it, I think it is a-- I think the practical answer is, and, and Rory kind of talked about the institutional investor who's gonna have significant money is, there is a lot of squish in the valuation that your private equity fund is reporting to you on your private equity position and the underlying valuation of each of those companies within the pool, which are then aggregated to come up with a pool, you know, a,

rory-liebhart_1_05-15-2026_130604

Yep.

big-ed--big-ed-_1_05-15-2026_130603

value or a fund value. So proceed with caution and don't, you know, basically don't count those, don't count those dollars before they hit the bank because they may be particularly, you know, in a period of rising interest rates or a period of uncertainty, they may be significantly, overvalued at present relative to what you'd be able to realize on a transaction. And that's the kind of the underlying piece of this is you're gonna get a statement or a report out from your, from your private equity general partner that says, you know, "Your, your portion of fund seven is worth eleven and a half million dollars." eleven and a half million dollars probably plus or minus

rory-liebhart_1_05-15-2026_130604

Yeah.

big-ed--big-ed-_1_05-15-2026_130603

because that val- underlying valuations of the companies within there are s- are so subjective both in terms of value, uh, which Rory noted, you know, it's tough when you've got all these components in there that you could go, "Well, you know, what's the liquidity? What's the non-liquidity premium?" in terms of timing you know, that subjectivity really does provide a lot of, you know, like, like I said, plus or minus twenty percent would not... To me is actually probably a conservative estimate of how much that value can be in swing

rory-liebhart_1_05-15-2026_130604

Yeah.

emily-sander_1_05-15-2026_130603

So that's kinda like what I heard about nutrition labels,

rory-liebhart_1_05-15-2026_130604

Oh, really?

emily-sander_1_05-15-2026_130603

by, they said like 40 to 50%. I was like, "40-- like, but then

rory-liebhart_1_05-15-2026_130604

No way. I didn't know that. Huh. Not, not surprised, though.

emily-sander_1_05-15-2026_130603

Yeah. It, it-- Yeah. I mean, that might be for dramatic effect, but I think there is like a argument for like, hey, it's probably like plus or minus 10%, 'cause like, I don't know, like a potato or something, like a different sized potato or like a package of something might not have the exact

rory-liebhart_1_05-15-2026_130604

Yeah. You know what?

emily-sander_1_05-15-2026_130603

whatever.

rory-liebhart_1_05-15-2026_130604

Here's a, here's one takeaway that if, if, uh, one of our listeners is out there and they're in a meeting and somebody hands them a deck with all these performance metrics and they wanna sound smart, they can say, "Hey Are these values based on fundamental analysis or is this a GAAP basis? And you can sound smart. And I don't know what you can do with that information based on the answer you get, but you can sound smart asking the question.

emily-sander_1_05-15-2026_130603

You can check the smart box. Check, check. Um, what, what is this part of the calculation called again? So there was like impairment on the credit side. What is like

rory-liebhart_1_05-15-2026_130604

Mark to market.

emily-sander_1_05-15-2026_130603

mark to market? So people can be creative in

rory-liebhart_1_05-15-2026_130604

Yep.

emily-sander_1_05-15-2026_130603

to market

rory-liebhart_1_05-15-2026_130604

Yep.

emily-sander_1_05-15-2026_130603

or analysis.

big-ed--big-ed-_1_05-15-2026_130603

sound

rory-liebhart_1_05-15-2026_130604

Yeah. Truly.

emily-sander_1_05-15-2026_130603

I, in my head, I'm gonna be like, that is like in the Olympics for figure

rory-liebhart_1_05-15-2026_130604

I like your analogy. I do.

emily-sander_1_05-15-2026_130603

score that people

rory-liebhart_1_05-15-2026_130604

Yeah.

emily-sander_1_05-15-2026_130603

it's

rory-liebhart_1_05-15-2026_130604

Yeah.

emily-sander_1_05-15-2026_130603

a

rory-liebhart_1_05-15-2026_130604

His smile was good while he did the triple lutz,

emily-sander_1_05-15-2026_130603

All right.

rory-liebhart_1_05-15-2026_130604

More score. Yeah. Yeah.

emily-sander_1_05-15-2026_130603

Yeah. Yeah. The performance was, was,

rory-liebhart_1_05-15-2026_130604

Yes. Yes. I was moved by this mark to market valuation. I am moved to commit two billion more to your fund. I'm so moved. Yes.

emily-sander_1_05-15-2026_130603

Awesome. Well, I feel

rory-liebhart_1_05-15-2026_130604

Oh, good. Good. Yeah.

emily-sander_1_05-15-2026_130603

Ed.

rory-liebhart_1_05-15-2026_130604

Yep. Thanks, man.

big-ed--big-ed-_1_05-15-2026_130603

Go from triple luts to triple

rory-liebhart_1_05-15-2026_130604

Yeah, back to triple putts. That's,

emily-sander_1_05-15-2026_130603

there

rory-liebhart_1_05-15-2026_130604

that was pretty funny

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