The Spectacular Rise (and Imminent Collapse) of Private Equity

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The rapid growth of Private Equity has been blamed for pretty much every problem in America today, from mass layoffs to unaffordable homes. Some of this hate is totally justified, and some of it is just coming from second generation Wharton grads that didn’t land a summer internship at Blackstone. Whatever YOUR reason is for hating private equity, you will be happy to know that after a meteoric rise, the whole model that this industry was based on is now facing a spectacular collapse.
Private equity is very simply any investment into assets not listed on public markets. There are hundreds of thousands of highly profitable and promising businesses in America and millions around the world that you would never be able to buy using Robin Hood and some pocket money.
Private companies that are not listed on public stock markets don’t have the same reporting requirements so it can be extremely difficult and time consuming for investors to get a good idea of if a business is worth buying and how much it would be worth if it is. This is where private equity FIRMS stepped in as middle men to offer rich investors access to this untapped market.
If you were a billionaire, or the manager of pension fund their pitch to you was simple, they could give you higher average investment returns than you could get in the boring old stock market, your returns would be less volatile, and your money would be safer from market crashes. They could do this because they employed a crack team of the best business analysts in the world to do all the hard work of finding and buying a private company or alternative asset on your behalf and extracting as much money as physically possible out of it.
Sounds too good to be true right? Well, it is…
Private equity has pushed it’s business model too far and now it has trillions of dollars’ worth of assets that nobody wants, which sounds like a good thing for regular people who have been the victim of the layoffs and cost cutting that private equity has become famous for right? Wrong… There are four reasons why Private Equity is failing, and four reason why all of us are going to be the ones paying for it.
Private equity managers could reinforce this idea by only selling their highest performing assets furthering the illusion that everything in the portfolio was doing equally well. The very fact that these assets don’t have instantly updated price information actually made them even MORE attractive with certain fund managers because it let them claim to their own investors that their money was growing steadily even during turbulent markets. For a while this was true, after all something is worth whatever a buyer will pay for it, but now the investing public has realized that private equity firms are holding onto a lot of garbage that is going to be very hard to sell.
All investment carries risk and if this were just a story about financial managers delivering bad returns to rich investors after making big promises it wouldn’t need its own video, but a lot of Private Equity money is YOUR money, and if this convenient lie unravels, it’s not going to be the private equity partners losing their jobs. So it’s time to learn How Money Works to find out how Private Equity failed to live up to it’s promises and how we are all going to pay the price of that lie.