Private equity sure looks like a hell of a business to be in. Buy companies on the cheap, strip out as many costs as you can, lever it as many times over as lenders will allow and use the proceeds to pay yourself, laugh all the way to the bank regardless of what happens to said business, although usually what happens is that you sell it to some other p.e. firm. It may be economically destructive and socially corrosive, but it works, in its own way. And the people who run private equity firms want you to know that it works especially well when everything else is headed straight into the toilet.
Marc Rowan, chief executive of Apollo Global Management Inc., recently told analysts that “[t]he trends that we’re seeing in the marketplace, specifically rates up and volatility, historically have been very good for our business.”
Funds launched during the most recent recession weren’t great performers. Private-equity fund vintages from 2007 through 2010 performed worse than funds launched later…. This record doesn’t improve when viewed through the lens of public-market equivalent analysis, which compares the performance of private-equity funds to publicly traded stocks, taking into account the lack of liquidity of the funds. Based on this analysis, private-equity funds launched in 2007, 2009 and 2010 underperformed the S&P 500 index each year, and matched the index’s performance in 2008….
“We are in a big bubble in the private markets,” [CIO Vincent] Mortier said. “If I take an extreme analogy, for some parts, the private equity market may look like a Ponzi scheme, a pyramid, in a way….”
“The vast majority of deals are currently done between private equity players, “ Mortier said. “One private equity player will sell to another one who is happy to pay a high price because they have attracted a lot of investors….”
“When you know you are able to exit your stake to another private equity house for a multiple of, let’s say, 20, 25 or 30 times earnings, of course you won’t mark down your book,” Mortier said. “That’s why I’m talking about a Ponzi because it’s a circular thing.”
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