The Economist - USA (2021-12-18)

TheEconomistDecember18th 2021 Finance&economics 57

marketssuchfundstoend­investors.
Thebeliefthatprivatereturnswillbe
superiorreflectsavariety ofcontestable
arguments:thatinvestorscanearnan“illi­
quidity premium” for having money
lockedupinassetsthatdonottradefreely,
say,orthatprivatemarketsarelesseffi­
cientthan publicones, allowingskilled
managerstoexhibitconsistentoutperfor­
mance.Scepticsthinkthatopaqueprivate
marketsallowmanagerstomaskhighle­
verageandvolatility.Fornow,themagic
formulaisworking.Somebiginvestorsre­
port annual returns in the mid­teens
acrossprivate­assetclassesthisyear,with
thoseonpeabove50%.Bycomparison,the
s&p500,anindexofAmericanstocks,has
produceda returnof24%.
Luredbyhighreturns,someinvestors
arekeentobemoredirectlyinvolvedin
runningprivateassets,ratherthanbeing
passivecustomersofthebigprivate­capi­
talmanagers.apg, a Dutchpensionman­
agerthatoversees$703bn,aimstoownat
least10­15%ofeveryfunditbacks,soasto
negotiateveto rightsoverstrategicmat­
ters,saysPatrickKanters,itsprivate­mar­
ketsboss.Manybiglimitedpartnersalso
“co­invest” alongside funds directly in
portfoliocompanies,whichallowsthem
morediscretionoverthesizeoftheirexpo­
sure,andlowersoverallfees.Somebypass
managersentirely.Co­anddirectinvest­
mentsaresettoreach$265bnthisyear,the
highest­everamountbyfar.Largeinves­
torsin“real”assets,whichincludeproper­
tyandinfrastructure,have become full­
fledged developers, enabling them to
createtheirownpipelineofdeals—wheth­
erforstudenthousingorhospitals—and
pocketa fatmargin.

Changingthetune
Yetthescaleoftheboomisalsoa sourceof
unease.Valuationsarecreepingup.Ina
surveyof 71 globalinstitutionscarriedout
byProbitasthisautumn,65%rankedun­
healthycompetitionfordealsasthebig­
gestrisk,upfrom55%lastyear.Frenetic
activitymeanslessduediligence.Limited

partners (as the ultimate investors in

fundsareknown)havelittletimetoforge

relationshipswithnewmanagersanddi­

versify their bets. Some are recruiting

morestaff,triggeringwhatMaximeAucoin

ofcdpqcallsa “warfortalent”.Meanwhile

managersarefeelingrushed,too.“Deci­

sionsarebeingmadeonbiggerdollarsin

fewerdays,”notesSteveMoseleyofapfc.

Theamountof“drypower”,thetotalcom­

mittedtofundsbutnotyetspent,standsat

arecord $3.3trn.Thepressureto deploy

capitalmeansfundmanagershavelessin­

centivetoevaluatepotentialtargetsstrict­

ly,ortoturndowndeals.

Alongsidefrothybehaviour,theother

risksaretheeconomyandinterestrates.

For now a roaring American recovery

meansthattheunderlyingperformanceof

thefirmsandassetsthatprivatemanagers

ownisdecent.InNovember,forexample,

Blackstonetoldinvestorsthat,forthefirst

timeever,everyoneofthecompaniesthat

itownedwasexperiencinggrowingrev­

enues.Risinginterestratesarea concern,

however,astheycandeflateassetprices,

imposestressonindebtedcompaniesand

make it harder to raise debtto finance

deals.SofartheFederalReserve’spivotto­

wardstighteningmonetarypolicyhasnot

roiledcreditmarkets:junk­bondyields(a

proxy forinterest rates onriskier debt)

haverisenfrom4%inSeptemberto4.5%

now.Buttherecouldbemoretocome.

Flush with cash amida deal frenzy,

whatis theindustry to do?One option

wouldbetoliquidateportfolios,thatis,to

sellmoreassetsthanitbuys,ineffecttry­

ingtocashinsomechipswhenpricesare

high.Asyet,however,thisdoesnotseem

tobehappening.Takethefiguresforthree

bigmanagers,Blackstone,Carlyleandkkr.

Sofarthisyearforevery$1ofassets,inag­

gregate, that they have sold, they have

bought $1.30.Although Carlyle is being

morecautiousthantheothertwofirms,

these figures indicate that the industry

overallthinksthegoodtimeswillrollon.

That suggeststhatifthere isanyre­

strainingforceintheindustryit istheulti­

mateinvestors.Someare hedgingrisks.

Australia’sFutureFundisrebalancingits

real­assetportfoliotowards“defensive”as­

sets,suchashousingblockswitha diverse

setoftenantsthatit can“buildandholdfor

ever”,saysWendyNorris,itsdeputyinvest­

mentchief.Butfewinvestorsthinkthereis

an alternative to alternatives. All those

canvassedbyTheEconomistsaidtheirallo­

cationswouldcontinuetoedgeup.Some

havesourmemoriesfromthefinancialcri­

sis,whentheyrushedtodumpprivateas­

setsata loss,insteadofsnappingupbar­

gains.Thistime,evenifthemusicstops,

theywillkeepdancing.n

Uppingthetempo

Global,privateassetsundermanagement,$trn

Source:PitchBook *Unallocated capital †To March 3st

1

12

9

6

3

0

21†1917151311092007

Totalprivateassets

Allocatedcapital

“Drypowder”*

12

9

6

3

0

21†1917151311092007

Byassetclass

Other

Infrastructure

Property

Privatedebt

Privateequity

Siren song

Global, top 25 investors*

Source:Preqin *Byassetsundermanagement †To Dec 2nd

2

10

8

6

4

2

0

152011 21†

Averageallocation

towardsprivate

assets,%oftotal

1.0

0.8

0.6

0.4

0.2

0

152011 21†

Total allocation

towards private

assets, $trn

Economicsanctions

SWIFT thinking

F

or weeks Russia  has  been  massing

troops  and  tanks  near  the  Ukrainian

border. Neither talks with nor threats from

the  West  have  stemmed  the  flow.  With

America and its allies loth to commit forc­

es, another option is gaining prominence:

cutting Russia off from swift, the messag­

ing  network  used  by  11,000  banks  in  200

countries to make cross­border payments.

Flicking a switch seems safer than putting

boots on the ground. But it could have dan­

gerous consequences. 

A first hurdle would be getting swiftto

comply.  The  co­operative  of  banks,  based

in Belgium, vows to be politically neutral.

Many European countries, such as Germa­

ny,  do  a  lot  of  business  with  Russia,  and

may oppose the plan. But there is a prece­

dent.  In  2018  America  managed  to  force

swiftto  ditch  Iranian  banks  even  in  the

face  of  European  resistance.  America

would probably have its way again. It could

threaten to pull its own banks from swift,

The consequences of excluding Russia

from the global payments system