Europe’s largest asset manager has likened parts of the private equity industry to a “Ponzi scheme” that will face a reckoning in the coming years.
“Some parts of private equity look like a pyramid scheme in a way,” Amundi Asset Management’s chief investment officer Vincent Mortier said in a presentation on Wednesday. “You know you can sell [assets] to another private equity firm for 20 or 30 times earnings. That’s why you can talk about a Ponzi. It’s a circular thing.”
Public stock and bond markets leave little room for typical investment managers like Amundi, which has €2tn in assets, to hide their performance, as fluctuations in asset prices are easy to track daily or even in real time — a process known as marking to market.
Private equity houses, by contrast, typically lock up investors’ money for a period of several years, and information about whether their target companies have gained or shrunk in value becomes public only if they list the business or choose to disclose the price they sold it for to another buyer.
In the mean time, quarterly assessments are often sophisticated guesswork based on roughly equivalent assets in public markets, and shared privately with investors.
Often, private equity groups sell assets to other private equity groups. In 2021, they even struck $42bn worth of deals in which they sold portfolio companies to themselves.
Mortier said the incentives are for private equity firms to transfer assets between each other at inflated prices.
“Just because there’s no mark to market doesn’t mean there’s no risk,” said Mortier. “There are some very, very good opportunities, but there are no miracles. Eventually there will be casualties, but that might not be for three, four, or five years.”
Private equity firms have been flush with cash in recent years as they have been able to borrow at low interest rates, giving them enormous firepower to snap up companies. Globally, the private equity industry has more than $6tn in assets under management, according to a McKinsey report published in March.
They enjoyed their strongest ever start to a year in 2022 as they deployed vast cash piles accumulated during the pandemic. Buyout groups backed $288bn worth of deals in the first quarter, a 17 per cent rise compared with the first three months of 2021.
More mainstream investors, meanwhile, have been keen to find lucrative opportunities in this space as some parts of public stock markets have appeared overvalued, and bond yields have been historically low.
Mortier also expressed concern about public debt markets, in government and corporate bonds, noting that it is increasingly difficult to get deals done, particularly when the gap between the prices where investors can buy and sell has become unusually wide.
“It’s really concerning,” he said. “Banks are less and less doing their role of market making.” In part, that is because of regulation, which has tightened up since the 2008 financial crisis. “But as well, banks and traders are greedy. Regulators should probably have a look at this” as it could produce market accidents, he said.
Additional reporting by Kaye Wiggins