CIO of asset management giant says private equity funds sell assets to each other in 'circular' fashion
Parts of the private equity industry can be compared to a "Ponzi scheme" that will come to an end in the coming years, according to Europe's largest asset manager.
“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. “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.”
As noted by the Financial Times, because asset price variations in public stocks and bonds are easy to follow daily or even in real time — a process known as marking to market — traditional investment managers like Amundi, which has €2 trillion in assets, have little room to hide their performance.
Private equity firms, on the other hand, typically keep investors' money locked up for several years, and information about whether their target companies have increased or decreased in value becomes public only if they list the company or choose to reveal the price they paid for it to another buyer.
Meanwhile, quarterly appraisals are frequently based on educated speculation based on nearly identical assets in public markets and shared privately with investors.
Assets are frequently sold by private equity firms to other private equity firms.
Private equity groups have even been found to sell portfolio firms to themselves for US$42 billion in 2021.
Private equity firms are rewarded for transferring assets amongst themselves at inflated prices, according to Mortier.
In recent years, private equity firms have been flush with cash due to their ability to borrow at cheap interest rates, providing them considerable buying power.
According to McKinsey research released in March, the private equity business manages more than US$6 trillion in assets globally.
As they invested massive cash piles acquired throughout the epidemic, they had their best start to a year ever in 2022. In the first quarter of 2021, buyout firms supported US$288 billion in transactions, up 17% from the same period the previous year.
Meanwhile, since some areas of the public stock markets have appeared expensive and bond yields have been historically low, more mainstream investors have been eager to uncover attractive opportunities in this space.
Mortier also raised concern about public debt markets, including government and corporate bonds. He cited the increasingly difficult environment to close deals, especially when the spread between buy and sell prices has become exceptionally high.
“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 stiffened in the years 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.
