A senior executive at Denmark’s largest pension fund has likened the private equity industry to a pyramid scheme, warning that buyout groups are increasingly selling companies to themselves and their peers on a scale that “is not a good deal”.
Mikkel Svenstrup, chief investment officer at ATP, expressed concern that over the past year more than 80% of portfolio company sales by the private equity funds in which ATP has invested were either to another buyout group or were “continuation fund” agreements. , where a private equity group switches it between two different funds that it controls.
“We’re a big fund investor, we have hundreds of funds and thousands of portfolio companies,” he said. “Not a good deal, is it?” This is the beginning, potentially, I say “potentially”, of a pyramid scheme. Everyone is selling to each other. . . Banks lend against it. These are the concerns I shared.
ATP is a major investor in private equity funds. It has $119 billion under management and has committed money to 147 buyout funds, according to PitchBook data.
Svenstrup’s remarks, made at the IPEM private equity conference in Cannes, are similar to those made by Amundi Asset Management chief investment officer Vincent Mortier in June. Mortier said parts of the private equity industry “kinda feel like a pyramid scheme.”
Svenstrup said the “exponential growth” of the private equity industry in recent years, as investors poured cash into his funds, would “at some point” stop, adding that it was “just a matter of time”.
“It’s not that I think the private equity market is going to fall off a cliff,” Svenstrup said. “We’re just going to look [at] potentially low returns and high costs. He added that the industry plays an important role as a “key driver in moving certain companies through stages and eventually, hopefully, going public or being held by long-term owners.” .
ATP is reducing the number of private equity groups it commits money to, he told the conference.
“Obviously we looked very carefully. . . who refined [returns figures by] using bridge financing, leveraged funds. . . all these tricks they do to manipulate TRI,” he said. The IRR, or internal rate of return, is a key metric by which private equity groups report returns to their investors.