PitchBook News - Is PE a Ponzi scheme?

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The Weekend Pitch

October 16, 2022

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(Chloe Ladwig/PitchBook News)

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.

Welcome back to the Weekend Pitch, I'm Leah Hodgson. You can reach me at leah.hodgson@pitchbook.com or on Twitter @LeahFHodgson.

Quote/Unquote

"More than a third of the global economy will contract this year or next, while the three largest economies—the United States, the European Union, and China—will continue to stall. In short, the worst is yet to come, and for many people 2023 will feel like a recession."

—Pierre-Olivier Gourinchas, International Monetary Fund economic counselor, in the foreword of the agency's World Economic Outlook, published Oct. 11.

Deal flow

(Africa Studio/Shutterstock)

US startups borrowed $9.7 billion in venture debt in Q2 2022, the second-highest quarter on record.

But in the third quarter, venture debt deal value fell by half to $4.7 billion, the lowest quarterly volume since Q3 2017, according to our latest PitchBook-NVCA Venture Monitor.

Here's a closer look at why startups' appetite for debt has waned in recent months.

Did you know ...

(Lerbank-bbk22/Shutterstock)

… That the number of new fintech startups created across Europe has dropped 80% since 2021?

According to Finch Capital's recent State of European Fintech report, the sector is transitioning into a new normal of less funding and lower valuations as macroeconomic conditions drive increased caution among investors.

Datapoints

(anek.soowannaphoom/Shutterstock)

There have been 573 PE deals worth over $53.5 billion across China, Taiwan and the special administrative regions of Hong Kong and Macao this year, a dip from 2021's peak of 726 deals worth about $88.6 billion.

The cooldown comes amid economic headwinds ahead of President Xi Jinping's expected appointment for a third term.

Read more about private equity activity in China.

Recommended reads

Officials at the FTC regulate America's tech giants. They also invest in them. [The Wall Street Journal]

Managers at Harvard University's $51 billion endowment warn of heavy losses for their private fund holdings. [Financial Times]

The war in Ukraine has left Russia's space program adrift. [The Atlantic]

People have been searching for a fountain of youth for thousands of years. Celine Halioua thinks she's found one—for dogs. [Wired]

Do technology executives really see blockchain in their future? [Bloomberg]

Elon Musk may be an idiosyncratic leader, but if he buys Twitter he'll face a familiar business challenge: how to transform a legacy tech company. [Harvard Business Review]

This edition of The Weekend Pitch was written by Leah Hodgson and Priyamvada Mathur. It was edited by Chris Noble and Sam Steele.

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PitchBook News - Is PE a Ponzi scheme?

Quote/Unquote

Deal flow

Did you know ...

Datapoints

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Global approaches to sustainable investing

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