From PitchBook, October 14:
The problem with PE's pyramid scheme comparisons
For anyone working in finance, having your industry compared to a Ponzi scheme is less than ideal, to say the least. Unfortunately, for the private equity sector, this is what it has come to.
Over the past couple of months, two high-profile investors—and a veritable horde of Twitter commentators—have likened some parts of private equity to a Ponzi or pyramid scheme.
Vincent Mortier, CIO of asset manager Amundi, was the first to make the controversial comparison, citing an increase in PE firms selling companies to each other—otherwise known as secondary buyouts. He also warned of the opaque nature of the private markets, which can make it difficult to assess the true value of assets.
Mortier said: "You know you can sell [a company] to another private equity firm for 20 or 30 times [that company's] earnings. That's why you can talk about a Ponzi. It's a circular thing." He added later that there would undoubtedly be casualties, but maybe not for another four or five years.
While Mortier didn't say what kind of casualties, he may mean that, eventually, there will be no one left willing to buy overpriced assets, resulting in poor returns, or even losses, for investors and potentially company failures.
A few months later, Mikkel Svenstrup, CIO of Danish pension fund ATP, warned that PE was in danger of becoming a pyramid scheme, also due to an increase in secondary buyout activity. Svenstrup further noted that the proliferation of continuation funds—which allow GPs to move an existing asset, or multiple assets, into a special purpose vehicle in order to keep hold of their best-performing assets—is another red flag.
"This is the start of, potentially, I'm saying 'potentially,' a pyramid scheme," Svenstrup told the Financial Times. "Everybody's selling to each other … Banks are lending against it. These are the concerns I've been sharing."Put simply, a Ponzi scheme is a fraud where early investors are paid with funds obtained from later investors. This could mean investing in a company or technology that has no intrinsic value on the promise of substantial returns, and ending up with nothing.
While investing in PE always carries the risk of losses, any comparison to the above is flawed.....
....MUCH MORE
My question going forward is: "Should times get really tough will we see a return to the asset stripping/bankruptcy bust-out model?"
Wait. Did I say that out loud? I meant "will we see a semi-permanent step-change to lower valuations that trap capital?"
Yeah that's it, that's what I meant.
