TheEconomistFebruary 1st 2020 611T
herewasa time when a sure way to es-
tablish a reputation as a campus sage
was to bang on about the “dialectic”, or the
action of opposing historical forces.
Sooner or later somebody will apply the
term to asset management. The industry is
not short of would-be sages. And it has his-
torical forces of its own to contend with.
Over the past decade there has been a dra-
matic shift towards “passive” funds. They
track publicly listed stocks or bonds that
are liquid—that is, easy to buy or sell. The
most popular funds are huge, run by com-
puters, widely held and have low fees.
This passive boom has spawned its
antithesis—niche, run by humans, secre-
tive, thinly traded and high-fee. Institu-
tional investors are rushing headlong into
private markets, especially into venture
capital, private equity and private debt. The
signs are everywhere. A large and growing
share of assets allocated by big pension
funds, endowments and sovereign-wealth
funds is going into private markets—for a
panel of ten of the world’s largest funds ex-
amined by The Economist, the median share
has reached 23% (see chart 1 on next page).
Worldwide, pools of private capital, in-
cluding private equity and private debt, as
well as unlisted real-estate and hedge-fund
assets, grew by 44% in the five years to the
end of 2019, according to JPMorgan Chase.
A different way to capture the scale of the
private party is to look at the quartet of Wall
Street firms that specialise in managing
private investments for clients—Apollo,
Blackstone, Carlyle and kkr. Their total
managed assets have risen by 76% in the
past five years, to $1.3trn. They have long
specialised in buy-outs and property. More
recently they have grown in private-debt
markets, too—in total their funds’ credit
holdings have hit $470bn.Venture capital (vc), another part of the
private universe, is feverish. SoftBank’s Vi-
sion Fund, a $100bn private-capital vehicle
backed by Saudi Arabia’s sovereign-wealth
fund, has funnelled cash into fashionable,
unlisted startups. Other institutions have
vied with it to write big cheques for Silicon
Valley’s brightest new stars. Already some
of these bets have gone awry. WeWork, an
office-sharing deity-turned-dud, had to
cancel an initial public offering (ipo) in
2019 after public-market investors balked
at its valuation. This week Casper, a loss-
making firm that sells mattresses on the
web, announced that the value it is seeking
at ipois below its $1.1bn valuation at its pre-
vious funding round.
The flood of capital into private markets
ultimately rests on the belief that they will
outperform public ones. There is evidence
for this—in the past the best-run private-
capital managers have beaten the returns
from public markets, even after generous
fees. And there are grounds to believe that
this was no statistical fluke. Private capital,
say its boosters, reduces “agency costs”.
These arise wherever somebody (the prin-
cipal) delegates a task to somebody else
(the agent) and their interests conflict.
Consider the public markets—no one has a
big enough stake to make it worthwhile to
monitor firms, which as a result get com-
placent or indulge in short-term earnings
management to the detriment of the long
term. Private capital, which is closely held
in a few hands, is supposed to get around
such agency problems.Asset management
Privacy and its limits
When an idea is universally held in finance it often pays to be cautious. Right
now almost everyone believes that private markets are better than public ones
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