A few helpful markers have appeared in recent days for assessing current perceptions and expectations of private equity, including an editorial in the Financial Times on the recent move by the US Securities and Exchange Commission to open the asset class up to greater transparency.
The industry has resisted the SEC’s move. But according to the FT editorial, it’s right “to shed light on opaque private capital markets”.
The paper is no nest of pinkoes, so it’s reasonable to assume that it speaks with genuine financial markets logic. And its position is that the asset class has grown large enough now to pose genuine systemic risk if something comes unstuck, and that this not only justifies, but also necessitates, greater scrutiny.
Meanwhile, an opinion column, also in the FT, written by Drew Maloney, president and chief executive of private equity industry group American Investment Council, claims that “a power grab against private equity threatens the US economy”, shifting focus from the SEC to enforcement by the Federal Trade Commission. That’s been very much the tone of the industry response to current US government regulatory moves, and one wonders if it does the cause any service.
Other reports suggest that a more important body of opinion for private equity – the institutional investor base – may now have a less starry-eyed view of the asset class.
A report in The Wall Street Journal headlined “Pension Funds Go Cold on Private Equity” points out how large pension funds, formerly the industry’s core investor constituency, now “want to rein in the ‘alternative’ investment portfolios they once clambered to build”.
Wells Fargo, meanwhile, has just sold US$2 billion of interests in private equity funds to a consortium including AlpInvest, Lexington Partners and Pantheon.
According to a Bloomberg report, private equity funds reluctant or unable to exit investee companies at today’s valuations are taking out loans to replace the lost capital flow against future income among other assets, at interest rates of up to 19%. This is exactly the kind of potential systemic risk that the FT warned against.
Market fundamentals now may favour more traditional asset classes rather than the uniquely favourable cheap money environment since 2008 that supported private equity’s rise to its present volume. That is something for the asset class to deal with.
But shrill protests, and an apparent wish that everything could continue the way it was no matter how things have changed, is not a mark of a mature asset class. I do think that private equity will ultimately benefit from having its wings clipped. It’s a better fate, after all, than that of Icarus.
