Amundi warns that corners of private equity market resemble ‘Ponzi schemes’

Europe’s largest asset manager has compared parts of the private equity industry to a “Ponzi scheme” that will face mental reckoning in the coming years.

“Some parts of private equity look like a pyramid scheme in a sense,” Amundy Asset Management’s chief investment officer Vincent Mortier said in a presentation on Wednesday. “You know you can sell [assets] For another private equity company for 20 or 30 times profits. That’s why you can talk about Ponzi. It’s a circular thing. “

Public stock and bond markets leave little room for typical investment managers like Amondi, who has € 2 billion in assets, to hide their performance, as it is easy to track asset price fluctuations daily or even in real time – a process known as market marking.

Private equity houses, on the other hand, usually lock in investors’ money for a period of several years, and information about whether their target companies have accumulated or shrunk in value becomes public only if they advertise the business or choose to disclose the price they sold it. Go to another buyer.

Meanwhile, quarterly estimates are most often sophisticated guesses based on roughly equal assets in public markets, and shared privately with investors.

Often, private equity groups sell assets to other private equity groups. In 2021, they even made $ 42 billion worth of deals in which they sold portfolio companies for themselves.

Mortier said the incentives are for private investment firms to transfer assets between them at inflated prices.

“Just because there is no sign of the market does not mean there is no risk,” Mortier said. “There are very, very good opportunities, but no miracles. Eventually there will be casualties, but maybe it won’t be for three, four or five years.”

Private equity firms have been cash flowing in recent years because they have been able to borrow at low interest rates, giving them tremendous firepower to accumulate companies. Globally, the private equity industry has more than $ 6 billion in assets under management, according to a March McKinsey report.

They enjoyed them The strongest ever Starting a year in 2022 when they deployed huge piles of cash accumulated during the plague. Purchasing groups supported $ 288 billion in first-quarter deals, up 17% from the first three months of 2021.

More mainstream investors, meanwhile, were eager to find lucrative opportunities in this area, as some parts of the public stock markets seemed overvalued, and bond yields were historically low.

Mortier also expressed concern about public debt markets, government and corporate bonds, noting that it is becoming increasingly difficult to make deals, especially as the gap between prices at which investors can buy and sell has grown unusually large.

“It’s really worrying,” he said. “Less and less banks are doing their job of making a market.” Among other things, it’s because of regulation, which has tightened since the financial crisis of 2008. “But banks and traders alike are greedy. Regulators should probably look into it” because it could lead to market accidents, he said.

Another report by Kay Wiggins

Amundi warns that corners of private equity market resemble ‘Ponzi schemes’ Source link Amundi warns that corners of private equity market resemble ‘Ponzi schemes’

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