Europe’s largest asset manager has compared parts of the private equity industry to a “Ponzi scheme” that will face a downturn in the coming years.
“Some parts of private equity somehow look like a pyramid scheme,” Amundi Asset Management Investment Director Vincent Mortier said in a presentation on Wednesday. “You know you can sell [assets] to another privately held company for 20 or 30 times the profits. That’s why you can talk about a Ponzi scheme. It’s a circular thing. “
Public securities markets leave little room for typical investment managers such as Amundi, which has 2 billion euros in assets, to hide its performance, as fluctuations in asset prices are easy to keep track of. daily or even real-time, a process known as market valuation. .
Private equity firms, on the other hand, usually close investor money for a period of several years, and information on whether target companies have gained or decreased in value is only made public if they list the business or decide to disclose the price. they sold it. for another buyer.
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Meanwhile, quarterly valuations are often sophisticated assumptions based on assets roughly equivalent to public markets and privately shared with investors.
Private equity groups often sell assets to other private equity groups. In 2021, they even reached $ 42 billion in deals that sold portfolio companies to themselves.
Mortier said the incentives are for private equity firms to transfer assets to each other at inflated prices.
“Just because there’s no value in the market doesn’t mean there’s no risk,” Mortier said. “There are very, very good opportunities, but there are no miracles. There will eventually be casualties, but it may not be for three, four or five years. “
Private equity firms have been full of cash in recent years as they have been able to borrow at low interest rates, which has given them enormous firepower to take on business. Globally, the private equity industry has more than $ 6 trillion in assets under management, according to a McKinsey report released in March.
They enjoyed their strongest one-year start in 2022 as they deployed large piles of cash accumulated during the pandemic. Purchasing groups supported bids worth $ 288 billion in the first quarter, up 17% from the first three months of 2021.
Meanwhile, more conventional investors have sought to find lucrative opportunities in this space, as some parts of the public stock markets have seemed overvalued and bond yields have historically been low.
Mortier also expressed concern about public debt markets, in government and corporate bonds, and noted that it is becoming increasingly difficult to do business, especially when the gap between prices where investors can buy and sell has become unusually wide.
“It’s really worrisome,” he said. “Banks are playing less and less of their role in creating the market.” This is partly due to regulation, which has been tightened since the 2008 financial crisis. “But banks and retailers are also greedy. market, he said.
Additional report by Kaye Wiggins