A flippant, fearless, and fundamental countdown of big money investing.

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Art by Lauren Tamaki

#15 Bubbles

Private Equity’s $2 Trillion Problem

New York Public Library CIO Todd Corbin has a gripe with private equity. Survey after survey shows it’s the hottest asset class among institutions—and that’s part of his issue. To all of his peers pushing $100 million checks at Blackstone and Carlyle, know Corbin won’t be competing for those spots. But do hear him out.

Todd Corbin: So you want to hear my gripe?

CIO: Always.

Corbin: There are cyclical problems with private equity, and these will ultimately resolve themselves. The $850 billion in dry powder, high valuations: These are cyclical—they ebb and flow.

Then there are secular problems. These are much bigger, intractable issues. First, many of the market inefficiencies that existed in the 1980s and 1990s have been competed away, as the number of firms exploded and the industry became institutionalized. And that’s a big reason why returns in the industry have been compressing for 20 years. Many deals are intermediated in ways they didn’t used to be. Any firm selling itself is going to hire a banker, and that drives prices up. Great for the seller; bad for the investor. 

Looking out, more potential sellers of private businesses end up being private equity funds. Obviously that’s going to drive pricing up, too. But the other problem, for the new owner, is that a lot of the juice has been squeezed out: operational efficiencies and even leverage. How is the new owner going to make any money?

CIO I’ve wondered that, too. What’s going to happen?

Corbin: I don’t see it getting any better. In my mind, unrealized value is a much deeper, borderline existential, problem. A year ago, there was almost $3 trillion in unrealized value sitting in private market funds. In ’07, which was certainly a frothy time in private equity, it was $1.7 trillion. So we’ve more than doubled off of an already elevated level of the ’06, ’07, ’08 crazy years. With the IPO market a shadow of its former self, the business cycle maturing, and exit opportunities are less robust… How is all that going to clear? Investors won’t get liquidity within the timeframe they committed to. If you’re committing capital to a generic private equity fund, I would expect those partnerships will last 15, 20 years.   

CIO: Do you have a play?

Corbin: Secondaries. I think it’ll be a grinding discomfort with liquidity and returns, and then a flood. I’m not buying into mainstream private equity now, but at a 50% discount, I’ll take it.

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