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Author: Mukul Khandelia

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Equities

How Is Costco a Value Stock?

Much as I’d love to follow Peter Lynch’s advice and invest in companies I love as a consumer, it becomes significantly harder when those companies are trading at sky-high valuations.

One such company is Costco—a fan favorite for many of us, whether for its bulk bargains or the $1.50 hot dog combo. But Costco, the stock, has recently traded at eye-watering P/E (Price/Earnings) multiples approaching 60, making it more of a “browsing stock” than something you’d toss into your investment cart.

Shock and Awe

While casually browsing the holdings of the Avantis U.S. Large Cap Value ETF (AVLV), I did a double take—Costco was one of the top 10 holdings.

Even more surprising: its weight in the fund was greater than its weight in the S&P 500.
Wait… what?

How could a firm like Avantis, known for its quantitative discipline and value-driven approach, include a company trading at such lofty multiples in a value ETF—and give it an above-average weight?

Was Tesla next on the list?

The Plot Thickens

I knew that Avantis uses a combination of adjusted Price-to-Book (P/B) and adjusted Price-to-Earnings (P/E) ratios to rank stocks. Costco, to my knowledge, hasn’t done any major acquisitions, so its adjusted P/B should be very close to its reported figure—and that figure is high, roughly 12x, comparable to some tech names.

With both P/B and P/E running hot, I figured: this must be an error in their model.

Moment of Truth

I quickly sent an email to my ever-helpful Avantis counterpart to flag what I thought was a rare glitch in their quant matrix. A few emails and one Zoom call later—with a very patient analyst on the other end—my gleeful joy at unearthing the “find of the century” was gently laid to rest.

Here’s what I learned:

Context Matters in P/B

While Costco’s P/B ratio is high, its adjusted P/B—relative to other large-cap stocks in the large cap universe—puts it only in the 60th percentile. High, yes, but not disqualifying.

 Cash-Based Profitability Tells a Different Story

Avantis doesn’t rely on Net Income to assess profitability. Instead, they use a cash-based operating profitability metric, which excludes non-cash items like depreciation and adjusts for interest and taxes. This gives a clearer picture of how much cash a company actually generates.

And Costco? It shines.

Thanks to:

  • Upfront collection of membership fees
  • Delayed payments to suppliers
  • Low inventory holding periods
  • Depreciation from store buildouts

…Costco ranks well above average in cash-based profitability. According to Avantis, it lands in the top quartile of large caps using this metric.

 The Composite Score Still Wins

Even after factoring in its elevated P/B, Costco’s composite score using Avantis methodology, combining valuation and cash profitability, places it high in the rankings.

Key Takeaways
  • Using one simple ratio like P/E to judge whether a stock is expensive or not is a bad idea
  • In an environment where most large-cap valuations are elevated by almost every possible metric, even “value” stocks can look expensive by historical standards.
  • And most importantly: Trying to find “cheap” stocks in an expensive market is like trying to find clearance items in a luxury store. You can try—but set your expectations accordingly.
Categories
Private Investments

Why Investing Early in Secondary Evergreen PE Funds Is So Powerful

What Are Secondary PE Funds?

Secondary private equity funds—commonly referred to as PE secondaries—acquire interests in existing private equity funds or portfolios. Rather than participating in new (primary) fundraises, they purchase stakes from current investors such as Limited Partners (LPs) or through GP-led restructurings, often at a discount to Net Asset Value (NAV).

What Are Secondary Evergreen Funds?

Secondary evergreen funds combine the benefits of secondary strategies with an open-ended, semi-liquid structure. These funds:

  • Accept ongoing subscriptions (usually monthly),
  • Offer limited redemptions (typically quarterly),
  • Continuously invest in secondary deals.

This stands in contrast to traditional closed-end drawdown structures, which have finite lifespans and lock-up periods. For a deeper comparison of evergreen vs. closed-end fund structures, see our breakdown here:
Closed-End vs Evergreen Funds: Key Differences

Understanding Discounts in Secondaries

A defining feature of secondaries is the opportunity to purchase assets at a discount. This occurs when the secondary buyer acquires a position below its last reported NAV.

Typical discounts range between 10% and 15%, but they can vary widely to Premiums for high-quality or “trophy” assets and Deep discounts (up to 50%) for hard-to-value or distressed assets.

Why Do Discounts Exist?

Several key drivers create discount opportunities:

  1. Liquidity needs (e.g., LPs needing capital or rebalancing their portfolio)
  2. Unfunded commitments that represent future capital obligations
  3. Hard-to-value or illiquid assets
  4. Market dislocation or volatility
How Discounts Impact Secondary Fund Performance

When a secondary fund acquires an asset at a discount, they immediately mark it to the last NAV (Net Asset Value) because of fair market value principles and standard industry accounting practices. This results in an increase (bump) in value for the Secondary fund whenever a discounted asset is purchased by the fund.

Why Timing Matters: The Case for Investing Early

Let’s walk through a simplified hypothetical example to understand why early participation in secondary evergreen funds can be so powerful:

  • A new secondary evergreen fund raises $100 million with an initial fund priced at $10 per share.
  • It purchases assets at a 10% discount.
  • The assets are immediately marked at NAV, so the fund immediately reflects $110 million in value.
  • NAV per share jumps from $10.00 to $11.00 → a 10% gain for early investors.
  • In the following months, the fund raises another $100 million.
  • It again buys assets at a 10% discount, adding another $10 million in embedded value and the total fund value becomes $220 million.
  • The gain from the new discount ($10M) now reflects a ~5% increase across the fund.
  • NAV per share rises to approximately $11.50.

Bottom line: The earlier investor benefits not just once, but repeatedly, as new capital flows in and discounts accrue. The early investor made a nearly risk free gain of ~15% in just a few months in the above example. In addition, a portfolio of  PE assets should also gain in value of roughly 10% a year making a gain of ~30% in the first year as something very feasible through a combination of accrued discounts and asset appreciation.

A study by Cliffwater found that the first year return for the funds in secondary evergreen funds significantly outperformed returns in the second and third years—further reinforcing the value of early entry. Getting a 30% or higher return in the first year was not unusual among the funds that were studied.

Caveats

The market for secondary evergreen private equity funds stood at approximately $50 billion at the end of 2024 and is projected to grow rapidly in the years ahead. However, the maturity of the fund is just one factor in evaluating the attractiveness of a secondary fund.

Investors should also carefully evaluate:

  • The track record and experience of the manager,
  • The fee structure and liquidity terms,
  • The strategy of the fund and the quality of the assets
  • The fit of this asset class with the rest of the investor’s portfolio
  • Whether the secondary fund can grow in size over time
Conclusion

The opportunity is significant, but the window is narrow. Investors who can identify quality managers and who can commit capital in that critical first few months can benefit from a structural advantage that builds over time.

Currently, there are a number of quality managers who are launching secondary evergreen funds to compete against one another making this is an opportune time to invest in this asset class.

If you’re considering adding this strategy to your portfolio and want help evaluating options, we’re here to assist.

Categories
Private Investments

How Not to Invest in Private Markets

Barry Ritholtz’s book, How Not to Invest, offers a compelling exploration of common investment mistakes. His central thesis is that by simply avoiding unforced errors, investors can dramatically improve their outcomes. While the principles of public market investing are well-documented—if not always easy to follow—private markets remain less understood, partly due to their relative infancy. Still, the same cautionary mindset applies.

Private markets offer less transparency, fewer disclosures, and more conflicts of interest compared to public markets, making it harder for everyday investors to make informed decisions. While there’s enough material to write an entire book on the topic, this post highlights the most critical mistakes to avoid when investing in private markets.

To be clear, this doesn’t mean you shouldn’t invest in private markets. They offer compelling advantages such as diversification, active management, and higher potential returns. But the landscape is complex and opaque, and investors must tread carefully when selecting the right products and managers.

1. Bad Advice

In private markets, much of the advice comes from product sponsors themselves. Independent media and third-party researchers often lack access to data, relevant experience, or proper incentives to provide truly unbiased views. Criticism—when it exists—usually comes from public asset managers, who are themselves now entering private markets after a decade of fee compression.

Because many sources have a direct financial stake, their “advice” is often self-serving. Regardless of market conditions—recession, boom, or stagnation—private market products are always being pitched as the best idea. This resembles a financial pundit  who invariably recommends “high-quality stocks” on CNBC, regardless of market conditions.

Key takeaway: Always evaluate the source of advice, their knowledge base, and their potential conflicts of interest before acting.

2. Bad Numbers
a. Unreliable Historical Data

Most historical data in private markets is incomplete, unaudited, or unreported. The concept of a consistent, comparable benchmark in private markets is virtually nonexistent. Claims based on “historical outperformance” often rely on optimistic assumptions or cherry-picked subsets of data.

Private markets also have shorter track records than public markets. As with hedge funds, alpha was easier to find when fewer dollars were chasing fewer deals. Today, with larger deal sizes and more participants, repeatable outperformance is far more difficult to achieve.

For example, private equity deals that once traded at 6x EBITDA multiples are now being priced at 12x EBITDA. Much of the industry’s historical success came from multiple expansion—a trend unlikely to continue.

b. Leverage as a Mirage

Private equity has historically relied on leverage—hence the term “leveraged buyout” (LBO). When debt was cheap, firms could enhance returns dramatically by borrowing more. But with rising interest rates and tighter credit conditions, this tailwind is fading.

Even in private real estate, which also heavily uses debt, returns have suffered recently compared to more conservatively financed public REITs.

Yet, very few sponsor presentations clearly show how much leverage was used to generate returns.

c. IRRs Are Not Returns

Private market performance is typically reported as IRR (internal rate of return) rather than absolute return. While IRR can be useful (especially for staggered capital flows), it is not the same as total return—and can be misleading when used for comparison to public investments.

If a sponsor casually substitutes IRR for return, consider it a red flag.

d. Volatility Laundering

Because private assets are infrequently marked to market, they appear to have lower volatility than public securities. This leads to what’s called “volatility laundering”—the appearance of stability without a corresponding reduction in actual risk.

Many investors mistake this lower volatility for safety, only to be blindsided by sudden, sharp markdowns.

3. Bad Behavior
a. Opaque Valuations

Valuations in private markets are often based on models rather than market prices. While sponsors may provide detailed valuation policies, these often include wide latitude in how assets are marked. This is especially dangerous in evergreen funds, where investors buy and sell at the stated NAV.

If NAV is inflated, you may overpay when entering and be undercompensated when exiting.

b. Unequal Treatment of Investors

Sponsors frequently offer better terms to larger or more sophisticated investors—lower fees, reduced carry, or access to co-investments—while smaller investors unknowingly subsidize the difference. These preferential terms don’t have to be disclosed to all participants.

Many investors have no idea they’re receiving inferior treatment.

c. Hidden Fees

Beyond management fees and carry, sponsors often charge a variety of additional expenses:

  • Marketing costs

  • Legal and accounting fees

  • Fund and SPV operating expenses

  • Distribution and administrative charges

Many of these go to affiliated entities and can become a meaningful revenue stream for the manager. While disclosed in fund documents, the true impact can surprise even experienced investors.

d. Overly Optimistic Proformas

To raise capital, some sponsors publish inflated projections—often showing 20%+ IRRs. In reality, very few investments achieve those numbers, and these models often rely on rosy assumptions that are unlikely to materialize.

Final Thoughts

This isn’t a complete list of pitfalls in private investing—but it covers some of the most common and costly. Most investors—and even many advisors—are not fully equipped to navigate the opaque and complex world of private markets.

That’s not to say these investments don’t have a place in your portfolio. If you’re a high-net-worth investor, the right private investments can offer attractive, differentiated returns.

But in this space, due diligence isn’t optional—it’s essential.

Considering a private investment?
Make sure you understand what you’re getting into—and don’t hesitate to reach out for help evaluating your options.

Categories
Private Investments

Closed-End vs. Evergreen Funds: Key Differences

Private equity (PE) is an investment strategy that appeals to high-net-worth individuals and institutional investors alike. However, not all PE funds are structured the same way. Two primary types of private equity funds—closed-end funds and the newer open-ended, evergreen funds—are gaining attention, especially among wealth advisors and private investors.

If you’re considering private equity for your portfolio, it’s essential to understand the nuances between these two types of funds. This blog post explores the key differences, helping you decide which is right for your investment needs.

1. Ease of Access

One of the key differences between evergreen funds and traditional closed-end funds is ease of access.

  • Evergreen funds are typically easier to access. Many are available to accredited investors, and some can be accessed by qualified clients. The minimum investment thresholds are generally lower compared to traditional closed-end funds, and the subscription process is simpler, making them a more accessible option for many investors.

  • Closed-end funds, on the other hand, often have higher minimums, and the paperwork required to invest can be more complicated. As a result, these funds can be more challenging for smaller investors to access.

2. Tax Treatment

When it comes to tax filings, evergreen funds tend to offer a simpler process.

  • Most evergreen funds issue a 1099, which is easier for individual investors to file. Even if the fund issues a K-1, it’s typically limited to a single state, reducing the complexity involved in preparing your taxes.

  • Traditional closed-end funds, however, typically issue a K-1. These forms often include multi-state filings and require more time and effort to navigate, especially if the fund has investments in multiple states.

3. Capital Calls

Capital calls are a critical part of managing a private equity investment, but they can be a significant inconvenience for some investors.

  • In a traditional closed-end fund, capital is called over a period of 3–4 years. The timing of these calls is often unpredictable, which can create liquidity challenges. For individual investors, this unpredictability can be difficult to manage.

  • Evergreen funds simplify this process by requiring a single upfront investment. Once you’ve committed your capital, there are no additional calls to worry about.

4. Liquidity

Liquidity is a common concern with private equity, but evergreen funds generally offer more flexibility.

  • Most evergreen funds feature quarterly redemption windows, typically allowing investors to redeem 3–5% of the fund’s AUM, at the manager’s discretion. While this has worked well in certain funds like BREIT and SREIT, the long-term liquidity in a downturn or recession is still uncertain.

  • In contrast, traditional drawdown funds typically lock up your investment for 10–15 years, with no redemption options available until the fund’s exit.

5. Valuation

Valuation is another area where the two fund types differ significantly.

  • In a closed-end fund, valuations aren’t a huge concern because all investors enter at the same time, and the fund exits when the portfolio is sold or realized.

  • Evergreen funds, however, require continuous valuation of assets. Since new investors enter and exit at different times, it’s essential to rely on the manager’s ability to value the portfolio correctly. If the valuation is inaccurate, you may overpay or underpay for your stake in the fund.

6. Performance

The performance of closed-end funds and evergreen funds also differs due to structural factors.

  • Closed-end funds generally target a higher IRR (Internal Rate of Return)—often around 15%—due to their active management and the fact that they can optimize IRR through tools like credit lines to delay capital calls.

  • Evergreen funds, on the other hand, often hold a portion of assets in cash or equivalents (sometimes 20%+) to meet redemption requests. This cash buffer can dampen returns, and as a result, these funds typically target a more conservative 12% IRR.

Additionally, the cash allocation in evergreen funds makes it difficult to determine exactly how much of the fund is deployed in investments, which could affect overall performance.

7. Fees

Fees are a critical consideration when evaluating any private equity investment.

  • Since evergreen funds are often marketed to the retail/wealth management channel, their fees are generally higher than traditional funds. Distribution costs add to this, and fees can vary significantly across different evergreen funds.

  • In contrast, traditional funds typically calculate management fees based on committed capital, which remains static over time. This structure is more predictable and tends to result in lower overall fees over the life of the fund.

8. Entry & Exit Timing

How you enter and exit the fund can significantly impact your returns.

  • With a closed-end fund, it’s often better to wait until the fund is closer to its close date to invest. This way, the portfolio is more “mature,” and potential unrealized gains may reduce the upfront cost. However, since these funds have a long time horizon (usually 15 years), any gains will likely be smaller.

  • In evergreen funds, the optimal strategy is typically to invest immediately, as the fund’s composition can change rapidly due to inflows and redemptions. Secondary funds, however, offer better entry points early on, as the asset pricing is adjusted to market value.

9. Co-Investments

Co-investments can provide valuable exposure to specific deals, but they come with different implications in each fund type.

  • Traditional funds often offer co-investment opportunities with low or no fees, making them attractive for investors who want to increase their exposure to a specific asset.

  • In evergreen funds, direct co-investment opportunities are less common. If they do exist, you’ll still be subject to the same management fees as the rest of the fund, making the overall cost relatively higher.

Conclusion: Which Fund Type is Right for You?

For most private wealth investors, evergreen funds tend to be a better fit due to their easier access, limited liquidity, and simplified tax treatment. These funds are ideal for those who value flexibility and a more predictable investment experience. However, as the space evolves, it’s important to stay informed and conduct thorough due diligence. The right choice depends on your specific financial goals, risk tolerance, and investment horizon.

Feel free to reach out for further questions or assistance in evaluating your private equity options.