Excellent article, David, and thanks for bringing more attention to the equally excellent body of work by Damodaran. While he deals mainly with listed equities, his findings often apply to investments in private equity and other illiquid assets as well. I would recommend two of his papers in particular: The first is "The Value of Transparency and the Cost of Complexity" (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=886836), which points out that "the financial statements of a few firms are designed to obscure rather than reveal information."
The second is "Marketability and Value: Measuring the Illiquidity Discount" (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=841484), which includes this important caution:
"With publicly traded stocks, we generally use market prices to measure returns and these prices should reflect the consequences of illiquidity directly. In other words, a portfolio manager who invests primarily in less liquid stocks will not gain an advantage over one who invests in more liquid stocks. With private equity and venture capital funds, where the assets are not traded and the valuations are generated internally (by the fund managers), the stated value of a portfolio may be misleading if illiquidity is not explicitly factored into the value. In general, this will lead to returns being overstated at funds with more illiquid investments and the magnitude of the misstatement will be greater in periods of overall market illiquidity (when liquidity commands a greater premium)."
I have often found that the marketing materials for private equity and hedge funds focus on the narrative, either ignoring actual performance data completely or making careful use of false and misleading data. Investors who follow this narrative-only lead have tended to make bad investments.
The supposed illiquidity premium is a wonderful example. Theory suggests (and Damodaran emphasizes) that investors should not be willing to make an investment unless they will be compensated for illiquidity risk--that is, the REQUIRED return is higher for illiquid investments. But the marketing pitch--the narrative with either no data or false data supporting that--turns it into a higher EXPECTED return. Actual performance data do not support the existence of higher realized returns for illiquid assets: that is, the expected return is actually less than the required return. An analysis that, as Damodaran recommends, balanced the narrative with actual data would have caused many PE and hedge fund investors to avoid them.