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The ‘wacky dynamic’ at play in private equity

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OPINION: Private equity firms are on the hunt for new capital at a time when institutional investors are growing alarmed at the trend for buyout groups to sell companies to themselves.

Private equity funds are ramping up their efforts to raise fresh capital, even though the continuing turmoil in global share markets and the steep rise in interest rates have largely slammed the door on new listings, and caused buyout deals to slow to a trickle.

The fervid capital raising is taking place even though takeover activity has ground to a virtual halt, and is unlikely to recover any time soon.A from the private equity industry”, Kleinman said, Bloomberg reported. Already, there are signs that investors are increasingly offloading their stakes in private equity funds to other investors to raise liquidity.

“This is not good business, right? This is the start of, potentially...a pyramid scheme. Everybody’s selling to each other ... Banks are lending against it.” In June, Mortier argued that parts of the private equity industry resembled a “Ponzi scheme” that will face a reckoning in coming years. Typically, private equity firms value these businesses by using some combination of discounted future earnings, and a comparison with the valuations of similar, listed companies

 

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