Two years ago, when the economy was a runaway train, so were the returns on private equity investment. Among the biggest winners were the big public pensions, which invested tremendously $500 billion out of a total of $4.5 trillion in private equity – one in $10.
But with share prices falling, experts fear private equity returns aren’t far behind. Allegations are flying that private equity firms are running an elaborate sham to hide their losses.
“Everybody’s happy to sing until the music stops,” said Eileen Appelbaum, co-director of the Center for Economic and Policy Research. “We could get to a dangerous and scary point.”
Private equity firms make money by buying companies, restructuring them and trying to sell them for a profit. But until the sale, and in some cases even after, it is the private equity firm that declares what the company is “worth”.
Even the value of listed companies It has accidentandthose valuations have remained high, making those estimates increasingly fanciful.
“It’s getting ridiculous,” said Jeffrey Hooke, a senior lecturer at Johns Hopkins Carey Business School. From one number, “In the first three quarters of 2022, the stock market was down 24%, while private equity said we were down just 7%. Does not make sense. It seems totally illogical and bloated.
AAt some point, companies need enough liquidity to repay investors. In an apocalyptic scenario, the stock market will not recover and it will become impossible for companies to keep up with fiction.
The head of Europe’s largest asset manager, Amundi, compared the market last year with a “pyramid scheme”, partly because so many private equity firms are selling each other’s portfolio companies as a way to keep prices inflated.
If the unthinkable happens, it won’t be just those in the private equity industry who will suffer. Millions of Americans with public pension plans could be within the radius of the explosion.
“Everyone is happy to watch the game until the music stops.”
– Eileen Appelbaum, co-director of the Center for Economic and Policy Research
The public pension funds were growing your investments in private equity for nearly a decade. With an aging workforce, investments and low-risk contributions from younger workers are not enough to fund benefits for all the teachers, firefighters, transit workers and other public sector professionals who are close to retirement for life. The national deficit is a staggering $1 trillion, prompting pension officials tasked with closing the gap to turn to riskier, so-called alternative assets such as real estate, private loans, hedge funds and private equity.
Private equity firms, in turn, sensed their desperation and used it to do just that. pocket billions of dollars in taxes. Firms typically take a 2% management fee regardless of whether an investment pays off, meaning a $1 billion bad investment would still result in a $20 million windfall for private equity firm. When the investment makes money, their commission increases to 20% of the profit.
At least, that’s the industry standard. Wall Street has amassed so much political power in state capitals that many states have laws that preserve the terms of their investment relationships a secret. In a recent example of their political power, Indiana exempt private equity firms from a proposed ban on investing state funds with companies that have made ESG commitments. Conservatives have derided ESG – or environmentally, socially and governance-responsible investing – as “woke investing,” so it’s notable that it offers such an important loophole.
The industry and its lobbyists have deep ties cultivated to officials who monitor and approve investments, from private sector gigs to generous travel expenses. In one particularly egregious example, a firm called Apax Partners helped pay Michigan officials fly to Florence and explore the Tuscan countryside on the vintage Vespa, according to Bloomberg. In Kentucky, which has the nation’s worst-funded pensions, hedge funds and private equity firms managed to compensate 1.3 billion dollars in investments over a five-year period, paying just $12 million to brokers, The Intercept reported. The first of these investments was in a hedge fund that closed 2 1/2 years later.
He often courted obsolete administrators. Unlike other countries, overseeing a public pension in the United States does not require experience in accounting or finance, and the position is often political. A 2011 rule SEC banned people who work in finance from making campaign donations to public officials, such as governors or auditors, who decide where to invest pension funds. But the rule only applies to direct contributions, not outside groups like super PACs. And as soon as the rule went into effect, the executives left find ways around it.
It’s not hard to see why experts warn that private equity is bad business for the public. The process is captured. Investments are risky. Pensions typically agree to lock up their money for at least 10 years, with the only performance updates coming in the form of estimates generated by the private equity firm itself.
The latter is the factor that worries experts. “The public will be holding the bag,” Hooke said. “When this is resolved, state governments and university endowments will have to cut grants or raise tuition or employee contributions.”
Scared by the recent alarms, some public pension funds are RESIZE future private equity investments. But they are already locked into billions of existing commitments. The Maryland State Pension Fund aims to reduce its private equity portfolio to 16% from nearly 22%.
“Everybody has already downed the Kool-Aid,” Appelbaum said. “I can’t go out now. They can only, as these commitments mature, choose not to reinvest.”
“The public will hold the bag.”
– Jeffrey Hooke, Senior Lecturer at Johns Hopkins Carey Business School
Hooke largely blames regulators for skyrocketing valuations.
“Basically, the two supervisors don’t supervise,” Hooke said. One is the US Securities and Exchange Commission, which only nominally oversees the private equity industry. “They said nothing about these huge and unexplained differences in performance. It’s supposed to be the drunk sheriff, but I’m not there.” Meanwhile, reviewers said they don’t have the bandwidth to dig deep into those ratings, he said. “They just print values.”
That leaves investors to ask tough questions and has an incentive not to. Skyrocketing private equity prices have allowed state pension funds to post some of the highest returns in years..
“Eventually,” Hooke said, “Even though everyone is basking in their false happiness—returns have made pension funds look better and better, everyone’s getting promotions and raises—eventually , the chicks will come home to shelter. “
Do you have any advice? Get in touch with [email protected]
I’m a passionate and motivated journalist with a focus on world news. My experience spans across various media outlets, including Buna Times where I serve as an author. Over the years, I have become well-versed in researching and reporting on global topics, ranging from international politics to current events.