The Economist (2022-02-26) Riva

14 Leaders TheEconomistFebruary26th 2022

cause of post-crisis regulation, private firms suchasApollo,

Blackstone, Carlyle and kkr have filled the voidbyexpanding

into debt markets. This has helped private marketstomorethan

quadruple in size since 2008, to over $10trn.

Meanwhile, the clients—institutional investorssuchaspen-

sion funds—have been desperate to pep up returns.Thepricesof

shares are already high, the income you get frombondshasbe-

come puny as interest rates have dropped, and anageingpopula-

tion is putting pressure on the solvency of pensionfunds.In

these circumstances, private markets’ record ofdecentreturns

is hard to resist. Public pension funds with large deficits,includ-

ing Calpers, a Californian giant, are praying thatpuntsonpriv-

ate markets will save them.

You might think this colossal bet would get

lots of scrutiny. In fact most criticism of private

funds has been directed elsewhere. Left-lean-

ing politicians, for example, worry about bar-

barian owners destroying jobs, when the evi-

dence of this is patchy at best. Meanwhile the

risk that returns will be mediocre is growing.

One reason is the law of large numbers. As

cash saturates the industry, it will tend to push down returns.

America now has 18,000 private funds, 50% more than five years

ago. The jostling will intensify further as large equity managers

such as BlackRock and Vanguard push deeper into private mar-

kets in response to a clamour from yield-hungry clients. There is

even a fast-growing market for second-hand private-equity

stakes. For investors this secondary market is double-edged: it

makes it easier to trade, but should reduce private assets’ “illi-

quidity premium”—the extra return investors enjoy for sacrific-

ing ease of selling.

Another worry is rising interest rates. Cheap debt is the life-

blood of buy-outs. Not everyone in private markets will suffer

fromhigherrates:theyareafillipforsomeprivate-debtstrat-

egies,notleastthosethatspecialiseinrestructuringcompanies

introuble.Butdearerborrowingisanetnegativefortheprivate-

capitalindustry.Afinalconcernisthatgovernmentswill,belat-

edly,clampdownonthetaxwheezesthatprivateinvestment

firmshavelongexploited,suchasthedeductibilityofinterest

paymentsandthe“carried-interest”loophole,whichallows

themtobookprofitsascapitalgains.

Noneofthismeanstheindustryfacesanimmediatecrisis.

Mostfundslockupmoneyforyears.Somewillcontinuetodo

wellbyhuntingforbargains,andtheevidencesuggeststhatitis

easierforskilledinvestorstooutperforminprivatemarkets

thanitisinpublicones.Nonethelesstheover-

allpotofmoneyinvestedinprivateassets

seemslikelytofaceaslow-burningdeterio-

rationinperformancethatleavesreturnslook-

inghumdrum.

Whattodo?Mostbigprivateinvestingfirms

haveshiftedfrombecomingniche,hands-on

investorstobeingfinancialsupermarkets,fo-

cused most on growing the asset base from

which they charge fees. They may need to reinvent themselves,

by, for example, finding opportunities that public markets ne-

glect, from building infrastructure to creating renewable energy

assets. And they will have to cut high fees as returns become

more pedestrian

The ultimate investors in private markets, such as pension

funds, can do their bit by insisting on lower fees and greater

transparency, or trying to bypass fees by investing in private as-

sets directly. Even so, it will become harder to avoid the reality

that private markets are not a magical solution to an era of low

investment returns and insolvent pension schemes. It is timeto

get real about what private markets can and can’t accomplish.

Global asset values

2000=

,

,





10052000 2115

Publicmarket

capitalisation

Private equity net

asset value

W

hen nelson mandela opened South Africa’s Constitu-

tional Court in 1995, he said it would determine “the future

of our democracy”. The first president of the democratic era ar-

gued that the court was as important to the new constitution as

the parliament and presidency. Judges should be “creative and

independent” in ensuring that, in contrast to apartheid, no per-

son was above the law, regardless of their race, power or wealth.

By and large, the judges have done their job. The Constitu-

tional Court has defended citizens failed by a callous state, for

instance by ordering the government of Thabo Mbeki to provide

antiretroviral drugs to people with hiv. It has challenged abuses

of power by Jacob Zuma, whose presidency in 2009-18 was de-

fined by widespread looting. Last year the highest court sent Mr

Zuma to prison after he disobeyed an order to appear at an offi-

cial inquiry into corruption during his tenure.

Yet the courts are facing grave threats (see Middle East & Afri-

ca section). Populist politicians who loathe the rule of law want

to see pliant judges appointed who will bend to their will. Those

who believe in the constitutional principles set out by Mandela,

including the president, Cyril Ramaphosa, are not doing enough

to safeguard his legacy. The mix of relentless attack and pusil-

lanimous defence bodes ill for South African democracy.

Critics accuse judges of overstepping their boundaries and

usurping legislation. It is true that the judicial branch has be-

come involved in politically rancorous disputes. But this reflects

the failure of the other branches of government to do their jobs.

The more politicians from the ruling African National Congress

(anc)have abused their privileges, and the more abject their

failure to improve the lot of ordinary South Africans, the more

ngos and opposition parties ask the courts to hold them to ac-

count. As Dikgang Moseneke, a retired justice, puts it, “Judges

don’t look for cases; rather cases look for judges.”

What is more, the courts’ critics do not really care about the

separation of powers. For ancpoliticians such as Lindiwe Sisu-

lu, who recently blamed “house negroes” on court benches for

South Africa’s ills, attacks are a shameless effort to pass the

blame. Ms Sisulu has spent more than two decades as a consis-

tently ineffective minister. In other cases cynical self-interest is

masquerading as legal criticism. Many spewing vitriol, includ-

ing Mr Zuma, who has compared judges to apartheid-era rulers,

South Africa must do more to protect its judges

Courtingtrouble

Democracy in South Africa