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Roula Khalaf, editor-in-chief of the FT, selects her favorite stories in this weekly newsletter.
If you don’t succeed at first, try again. And even. And even.
So far, the Norwegian government has been asked whether it would invest at least four times part of its vast oil-derived national wealth into private equity. He said no every time, the last time in April. I bet you a box of those delicious chocolate hearts from Oslo Airport that the government will revisit the issue before long.
For big investors – and at $1.6 trillion, Norway’s oil fund certainly counts – private markets are simply becoming too important to ignore. They have to put the money somewhere, and the universe of U.S.-listed stocks has shrunk by half from about 8,000 at the turn of the century. The UK has lost around a quarter of its listed shares in ten years.
Meanwhile, after a near-zero start in 2000, global private debt markets exploded to a total of $2.1 trillion, according to the IMF. Europe is about a decade behind the United States, where private credit is comparable in size to the country’s leveraged loans and high-yield bond markets, established items on the menu of traditional investors.
For years, hard-working bond and stock fund managers have looked at these markets with bewilderment bordering on disdain, often suggesting that it was a fleeting phenomenon and a consequence of the zone of cheap post-2008 money that is now dying.
Skeptics can also easily pick scare quotes from the financial markets old guard to justify staying away. Private credit, for example, has “fragilities” and is “opaque and highly interconnected,” as the IMF highlighted in its recent report on global financial stability. “If rapid growth continues with limited oversight, existing vulnerabilities could become a systemic risk to the financial system as a whole. » That’s fair, but the “could” is doing a lot of work here. As the report also notes, these risks now appear “limited”.
Private credit industry insiders boast that it was government debt markets, not private companies, that needed a bailout from the US Federal Reserve during the Covid crisis, and even Bankers who launch public company bonds for a living accept that their counterparts in the private lending industry frequently take action. to fill the void in tight market conditions. Despite some skirmishes, the two live side by side.
Smooth-talking private market industry insiders now argue more and more convincingly that holdouts no longer have reason to refuse to engage.
Appearing undeterred by the Norwegian government’s latest “thanks but no thanks” towards the asset class, Marc Rowan, chief executive of Apollo Global Management, spoke at an investment summit hosted by the chief from the oil fund Nicolai Tangen last week.
As the co-founder of one of the world’s most renowned alternative asset managers, Rowan was speaking clearly in his book. But he made some good points. Private markets, he pointed out, often arouse suspicion because they are difficult to negotiate. Investors who buy them know that it is difficult to exit in a hurry. They lack an easy way to track their portfolio’s performance on a day-to-day basis, much less a minute-by-minute basis.
But is it so serious? And is it really that easy to enter and exit public markets? “I don’t think so,” Rowan said. Stocks, of course. But as any trader will tell you, bond markets have gotten heavier since the 2008 crisis as banks chose or were forced to back away from taking risks and facilitating deals. The result, Rowan said, is that it now takes easily five days to sell even a highly rated corporate bond from a country outside the top 20 issuers.
Meanwhile, stock markets have become so lopsided in favor of a group of gigantic American companies that private equity, for all its flaws (and costs), still makes sense as a source of diversification and to escape the distortions linked to tracking indices.
Consider the top 10 U.S. stocks, which dominate the market and trade at huge multiples of their forward earnings. Looking around the room of asset managers, Rowan asked, “How many of us come to work every day trying to buy 45 stocks at the price-to-earnings ratio?” Probably none. . . I grew up thinking that public is safe, and private is risky. We will all have to overcome [these biases].”
Public markets are not going to disappear. Stock and bond prices will remain the primary way for investors to gauge the health of individual companies or national economies. But investors who wait for private markets to implode and become irrelevant are starting to resemble those who believe passive index investing is a fad. Large asset managers are focused on figuring out how to do it right, rather than whether to do it at all.
