Private Equity was considered a niche in finance for about a decade or more. Today it is holding assets worth 12 trillion dollars.
An article by the Economist magazine has given a view on Private Equity(PE). The power and prestige of investment banks and banking, in general, are due to the business taken from them. This has happened due to the various financial crises which allowed major brands and companies to their net for cheap. The assets under management of these firms are far more than America's 500 billion dollar stock market. They also attract and retain top talent on Wall Street.
America’s listed banks are worth a little more than they were before the pandemic. PE firms are worth twice as much. Blackstone is the flagship company of the PE industry. They are more valuable than Goldman Sachs or Morgan Stanley. It has extreme confidence in its execution of deals. Their motto as enunciated by their festive video with a Taylor Swift theme says that ‘we live in the alternatives era and we buy assets and turn them around.’
This is however not responsible for their current success. PE traditionally uses a lot of debt to buy companies known as leveraged buyouts, improving them and then exiting through selling or going public is the domain of the lifeless.
Interest rates being high have caused investors to pump in less money than usual and doubt has crept in but it does not matter. Though traditional PE exists just as a part of now we have the infrastructure, real estate and direct lending to companies, which now exist as “private assets”.
There is a buzz in the industry and an article in the Economist talks about how Private Equity is taking over life insurers. The gods of PE namely KKR, Apollo and Blackstone have bought these life insurance companies or taken some stakes in insurers in return to manage their assets. Smaller firms are getting into a herd mentality and following this trend.
The business strategy may make sense because PE too is a long-term investment like annuities
but what is the catch?
Private assets are illiquid and risky. It may offer a higher return. But having life insurance investments and pension funds give their money to private equity doesn’t. It's way too risky and when things go bad in private equity. They do go bad. Regulations for PE are lax and regulators barely keep up with the industry. Plus tie-ups, offshore accounts and the nitty gritty in finance tend to complicate problems.
The problem can be mitigated by having enough safety buffers for these financial institutions. Financial innovations can bring prosperity but a high degree of risk and that is what the regulators should be looking at.
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