Two years ago, when the economy was a runaway train, so were returns on private equity investments. Among the biggest winners included large public pensions that invested huge sums of money. $500 billion out of a total of $4.5 trillion In private equity, it’s a tenth of a dollar.
But with stocks plummeting right now, experts worry that private equity returns aren’t far behind. Private He has been accused of spinning elaborate fictions by equity firms to cover up losses.
“Everyone is happy to tune in to the game until the music stops,” said Irene Appelbaum, co-director of the Center for Economic and Policy Studies. “We may have reached a dangerous and scary stage.”
Private equity firms make money by buying, restructuring, and selling companies in hopes of making a profit. However, it is the private equity firm that declares the company’s “value” until and possibly after the sale.
As a listed company value have plungeEdtheir ratings remain high and their speculations seem increasingly fanciful.
“It’s ridiculous,” said Jeffrey Hook, a senior lecturer at Johns Hopkins Carey Business School. According to one statistic, “In his first three quarters of 2022, the stock market fell 24%, but his private equity says he’s only fallen 7%. It doesn’t make sense. That’s It seems completely illogical and exaggerated.”
aAt some point, the company will need enough cash to pay back its investors. In a doomsday scenario, the stock market will not recover and it will be impossible for companies to sustain their fiction.
The head of Europe’s largest asset manager Amundi last year compared the market like this: “Pyramid Scheme” One reason is that so many private equity firms are selling their portfolio companies to each other as a way to keep the prices of the companies they invest in skyrocketing.
People in the private equity industry aren’t the only ones to suffer when the unimaginable happens. The millions of Americans enrolled in the public pension system could be right in the explosion radius.
“Everyone happily joins the game until the music stops.”
– Eileen Appelbaum, co-director of the Center for Economic Policy Research
The public pension fund gradually increase investment Almost 10 years in private equity. As the workforce ages, low-risk investments and the contributions of younger workers alone will not suffice for all retiring or near-retirement teachers, firefighters, transportation workers, and other public sector professionals. cannot provide sufficient funding. With the national shortfall reaching his staggering $1 trillion, leading pensioners are closing the gap and investing in riskier so-called alternatives such as real estate, private loans, hedge funds and private equity. We have an obligation to look at our assets.
Private equity firms smell their desperation and exploit it to Pocket Billions of Dollars in FeesCompanies typically receive a 2% management fee regardless of whether the investment pays off. So even if his $1 billion investment fails, he’ll still have a $20 million windfall in his private equity firm. If the investment yields a profit, the fee balloons to 20% of the profit.
At least, that’s the industry standard.Wall Street has accumulated so much political power in the state capital that many states have enacted laws protecting the terms of investment relationships secretA recent example of their political power is the Indiana exempted Private equity firms have been exempted from a proposal to bar companies that have made ESG pledges from investing in state funds. Conservatives have derided ESG, or responsible environmental, social and governance investments, as ‘awakened investments’, so it’s notable that conservatives offer such a huge loophole.
industry and its lobbyists Deep bond cultivated From private sector gigs to officials who scrutinize and approve investments luxury paid travelIn a particularly egregious example, a company called Apax Partners helped pay two Michigan officials. Fly to Florence and explore the Tuscan countryside On a vintage Vespa, according to Bloomberg. Kentucky has the worst pension funds in the country, and hedge funds and private his equity firms have been able to profit. $1.3 billion It paid just $12 million to an influential broker to make the investment in five years, reports The Intercept. The first of those investments was a hedge fund that folded after two and a half years.
They often seek out peerless trustees. unlike other countriesoverseeing public pensions in the United States does not require an accounting or finance background, and positions are often political.2011 SEC rules Banned people in finance from making campaign contributions to public officials, such as governors and state auditors, who decide where pension funds are invested. However, this rule applies only to direct contributions and not to external groups such as Super PACs.And as soon as this rule came into force, management took action find a way around it.
It’s not hard to see why experts warn that investing in private equity is a bad deal for the public. process is captured. Investing is risky. Annuities typically agree to lock up funds for at least 10 years, and performance updates only come in the form of speculation made by the private equity firms themselves.
It is this last factor that is of great concern to experts. “The public is who has the bag,” Hook said. “If this falters, state government and university endowments will have to cut benefits or increase tax or employee contributions.”
Shaken by recent warnings, some public pension funds Shrink Future private equity investment. But they’re already pegged in billions with existing commitments. reduce The private equity portfolio increased from almost 22% to 16%.
“Everyone is already taking Kool-Aid,” Apelbaum said. “We can’t get out any time soon. As these commitments mature, they can only choose not to reinvest.”
“The public is who has the bag.”
– Jeffrey Hook, Senior Lecturer, Johns Hopkins Carey Business School
Hook primarily blames regulators for the runaway valuation.
“Basically, two supervisors are not directing,” Hooke said. The first is the US Securities and Exchange Commission, which only nominally oversees the private equity sector. “They say nothing about these vast, unexplained return differences. They’re supposed to be sheriffs of the beat, but they’re not there.” “They’re like putting a rubber stamp on the value,” he said, insisting he can’t afford to dig too deep into the valuation.
As such, the only people asking the hard questions are the investors themselves, and they are motivated not to do so.Private equity prices have skyrocketed in recent years, allowing public pension funds to record record returns..
“Eventually,” said Hook.
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