Bloomberg reported:
“We are in a big bubble in the private markets,” Mortier said. “If I take an extreme analogy, for some parts, the private equity market may look like a Ponzi scheme, a pyramid, in a way.” Last year saw buyout firms invest a record $1.1 trillion in new deals.
“When you know you are able to exit your stake to another private equity house for a multiple of, let’s say, 20, 25 or 30 times earnings, of course you won’t mark down your book,” Mortier said. “That’s why I’m talking about a Ponzi because it’s a circular thing.”
That ability to sell to peers has enabled firms to avoid marking down the value of the assets they own despite a broader selloff in public markets.
Selling to peers also avoids public disclosures on deal fees, annual management fees, special dividends and dividend recaps. Many PEUs milk enough funds from affiliates within a few years to cover their initial equity investment. In those cases little is lost if the affiliate enters bankruptcy other than dreams for gargantuan profits.
The Federal Reserve Bank has been successful in reflating assets after the 2008 financial crisis and exponentially growing income inequality. Will former PEU Fed Chief Jay Powell give his PEU peers another chance to buy companies at a discount or take them over via debt holdings in bankruptcy?
The Securities and Exchange Commission (SEC) has proven its inability to find ponzi schemes when directed by knowledgeable individuals. It has also remained hands off on private equity, in part because politicians Red and Blue love PEU and increasingly, more are one.
