Recent news has provided some examples of adverse signals for the sector. We learned that the American FTC intends to stick its nose into this juicy business. For his part, Amundi’s investment manager, Vincent Mortier, said in the Financial Times that some parts of “PE” look like a Ponzi scheme. However, these headwinds seem anecdotal when compared to the amount of funds collected, which has been breaking records year after year. “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,” he said. Obviously, a fairly sharp rise in interest rates would have an impact on the sector, as cheap money has been a major factor in driving investors into private equity.
The shift in the monetary paradigm provides the main arguments for the industry’s critics. A rise in interest rates could lead to a real bloodbath in the PE industry, as it is mostly exposed to direct financing with a sometimes unreasonable approach to risk, which consists of lending with minimal risk premiums to small or medium-sized companies that are already highly leveraged. Historically, no one in their right mind would have lent capital to a heavily indebted or second-rate borrower on these terms. The ongoing mechanics that should lead to a return to economic rationality do not really bode well for the sector.
The fundamental problem with PE is that it is an industry that favors managers over investors. It…
