Is the private equity industry constructing a giant pyramid scheme that could be bad for business? A number of influential investment managers in Europe seem to believe that.
Mikkel Svenstrup, chief investment officer at ATP, Denmark’s largest pension fund, warned that the increasingly common practice of private equity groups selling companies to each other, including to newer funds controlled by the same buyout firm, is concerning.
Amundi Asset Management’s chief investment officer Vincent Mortier said more or less the same in June: “Some parts of private equity look like a pyramid scheme in a way . . . You know you can sell to another private equity firm for 20 or 30 times earnings . . . It’s a circular thing.”
Such criticism has risen on the back of the private equity industry’s boom in so-called continuation funds, a new level of “creative” and lucrative financial engineering even for a sector run by top financial wizards.
This is where a buyout group sells an asset it has owned for several years to a new fund it has more recently raised. It is an evolution of the pass-the-parcel deals where one private equity group sold an asset to another in the secondary market.
The traditional image of buyout firms may have once been all about taking poorly performing listed companies private, loading them up with debt and carrying out brutal restructurings before making a profit around five years later by selling them — either to public…
