Amundi CIO Warns That Some Parts Of Private Equity Look Like “Ponzi Schemes”

Despite the market’s tumult over the last few months, credit markets have mostly held up well. At least, well enough to keep the the Fed from changing their tune for the time being (though we’re sure that’ll change).

But Amundi Asset Management’s chief investment officer Vincent Mortier is saying what a lot of us have been thinking about some of the darker, less transparent parts of the market. Namely, he said that some parts of the private equity industry are like a “ponzi scheme” that will “face a reckoning” in coming years, FT reported. 

In a presentation given this week, Mortier said: “Some parts of private equity look like a pyramid scheme in a way. 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.”

As the piece notes, private equity locks up investor capital and is highly reliant on marking investments to market instead of allowing public markets to determine their price. 

Over the last decade, private equity vehicles selling private assets to other private equity companies has come under scrutiny, since assets can be shuffled around at prices that outside public markets aren’t privy to (and may not reflect the asset’s actual value). 

Mortier argued that PE companies have incentive to keep shuffling assets at inflated prices. He continued: “Just because there’s no mark to market doesn’t mean there’s no risk. There are some very, very good opportunities, but there are no miracles. Eventually there will be casualties, but that might not be for three, four, or five years.”

And the firms have been very busy, as FT notes:

Private equity firms have been flush with cash in recent years as they have been able to borrow at low interest rates, giving them enormous firepower to snap up companies. Globally, the private equity industry has more than $6tn in assets under management, according to a McKinsey report published in March.

They enjoyed their strongest ever start to a year in 2022 as they deployed vast cash piles accumulated during the pandemic. Buyout groups backed $288bn worth of deals in the first quarter, a 17 per cent rise compared with the first three months of 2021.

Mortier concluded: “It’s really concerning. Banks are less and less doing their role of market making.” In part, that is because of regulation, which has tightened up since the 2008 financial crisis. “But as well, banks and traders are greedy. Regulators should probably have a look at this” as it could produce market accidents, he said.