Amundi warns that parts of private equity market resemble ‘Ponzi schemes’

https://www.ft.com/content/21c6e2e4-6c52-4d13-b3a2-5455d51d9970

by haasted • 4 years ago

82 43 4 years ago

sometimes i feel the whole market resembles ponzi. things getting expensive because there is a promise of price rising and more people getting into the market.

mym19902• 4 years ago

In times of great exuberance yes, but eventually the markets do revert back and generally the broad market has been a good source of consistent, reasonable returns(6-9%). One should use their own common sense when evaluating risk and the major reason to get into a market should not be simply because others are doing it.

zasdffaa2• 4 years ago

Surely others doing it is a perfect reason to do it. They pile in, market surges, you hop in and get lifted, and cash out before they do. Leaving aside the critical timing of that last step, it seems obviously right (for a short-term purely economics view)

mettamage• 4 years ago

I'm an armchair economist, hello! Are you one as well? Nice! We armchair economists should look out for each other, who else is going to do it ya know? ;-) I'd pour you some wine or any beverage of your choice if I'd see you in IRL.

In any case.

I disagree with your point. Companies that have solid fundamentals and fairly steady dividend payments do not feel like a ponzi at all. The deal is simple: you get a share, they give you a dividend. If management changes that, you can always sell the share.

Dividend payments is one of the best tools to keep a stock market (somewhat) honest.

clairity3• 4 years ago

this is a symptom of the short-termism in equity markets that we get from abstracting ownership away from involvement. it's a direct consequence that such markets become centers of gambling rather than long-term interest, because otherwise your focus would be on growing your main source of equity, rather than spraying and praying.

it's also why we should be wary of anyone spouting "markets provide liquidity" dogmatically. equity markets do provide liquidity, but only a trickle is needed for a well-functioning market, but the gamblers (traders, brokers, etc.) propel a tsunami of liquidity[0], because that's what benefits the gambling mechanics. we should leave gambling to casinos and let equity markets be about involved ownership. i'd made a related point yesterday about each person having one appreciating asset to nuture is great, but not having many: https://news.ycombinator.com/item?id=31573993 .

[0]: a similar phenomenon occurs in real estate, where only a trickle is needed, but brokers/agents try to drive sales past the natural equilibrium for their own benefit, and not the market's.

itsoktocry2• 4 years ago

this is a symptom of the short-termism in equity markets that we get from abstracting ownership away from involvement.

Except this is explicitly talking about private markets. You know, those places that VCs and people like Elon Musk claim companies need to be to avoid "short-termism" of public markets and have ownership be rewarded.

The reality is these money men want to be private so they never have to mark-to-market. The public markets enforce that.

tootie• 4 years ago

That's not a Ponzi scheme. So long as the sun shines, people are born, resources are extracted, raw materials are converted into finished goods then there is still real economic growth happening. When we turns rocks into computers and sunlight into seedless grapes we are creating value that didn't previously exist. The characteristic of a Ponzi scheme is money chasing money and no value being created.

dpflan• 4 years ago

Is “everything a Ponzi scheme” unless the entity actually can create “value” greater than the money put into it?

Is everything that exists in economies within the bounds of national economics and central banks a Ponzi scheme? A reshuffling of money within the closed economic system?

oh_my_goodness• 4 years ago

No? But maybe a qualified No that varies over time. https://www.bbc.com/news/magazine-26680993

dwallin• 4 years ago

More like everything can become a bubble. I think many have started using "ponzi scheme" to reference bubbles that appear to be crafted or manipulated by bad actors.

Animats2• 4 years ago

A Ponzi scheme is something where the payout for early investors comes from the pay-in of later investors. There's a lot of stuff with that property, from Uber to Bored Ape Yacht Club.

anm894• 4 years ago

This is a completely invalid definition of a ponzi scheme. What you have described is anything that is sold on an open market that is not directly used by the first buyer. By nature, every one of those things only pays out earlier investors when later investors buy in.

A ponzi scheme involves a company who has no underlying revenue model and just shuffles money from late investors to early investors. So uber isn't a ponzi scheme because it generates revenue with an actual line of business. The fact that investors buy into at different times makes it a business like every other public business in our economy, not a ponzi scheme.

Wohlf• 4 years ago

Don't social safety nets and pensions also meet this definition?

thedudeabides5• 4 years ago

What else do you expect when you hold rates at 0 for the better part of a decade.

jjtheblunt• 4 years ago

how did the low rates create virtual ponzi schemes?

jandrese3• 4 years ago

Excessively concentrated wealth with investors who then ran out of legitimate products that could offer decent returns and forced them into riskier and "more complex" assets?

I don't know if this really works, but it does seem like overcapitalization is causing a lot of knock on effects in the economy. Housing prices being a prime example.

fundad• 4 years ago

And then cut taxes

zeruch• 4 years ago

Parts?

I'm quite biased here, having been in a few ventures that got absorbed by PE; "Vulture Capital" is being kind, and I maintain that I'd love to see PE as a category, regulated into oblivion.

But the market writ large is mostly fine. PE I find trash.

clairity3• 4 years ago

PE can definitely be 'problematic' to put it lightly, but i did witness one example of a PE deal done well: a company was bought out by PE with the help of an involved CEO, who set aside a pool of money for employees if they hit key growth metrics that allowed the PE firm to sell within some number of years. a number of otherwise not-well-compensated employees were about to buy houses/pay off mortgages who otherwise wouldn't have been able to do so.

there's a difference between finance-based PE and fundamentals-based PE, with the former unfortunately being much more prevalent than the latter. finance-based PE uses financial leverage to restructure a company's capital structure to squeeze out gains, which is not really improving the company at all, and usually to the detriment of the now debt-laden company.

jjoonathan• 4 years ago

I thought it wasn't Ponzi so much as a strategy for attentive management companies to front-run inattentive investors to liquidation. It's the management version of employees walking out of a failing startup with aeron chairs and coffee machines -- so, naturally, a thousand times more damaging and a thousand times less punished.

jeffreyrogers• 4 years ago

PE might be unsavory but I don't see how it is a ponzi scheme.

anm894• 4 years ago

https://archive.ph/XuEzW

yieldcrv2• 4 years ago

if you respect something that pays out prior participants with the money from new participants, you will refuse to call it a ponzi

if you don't respect something that pays out prior participants with the money from new participants, you will call it a ponzi

that seems to be the entire distinction based on seeing these kind of conversations over many years, and also watching for what prompts SEC enforcement actions towards managers that launch new funds and what doesn't, as well as DOJ enforcement actions, as well as the structure of many credit and government products

jandrese3• 4 years ago

if you respect something that pays out prior participants with the money from new participants, you will refuse to call it a ponzi

Or if you simply go by the textbook definition of a Ponzi scheme.

yieldcrv2• 4 years ago

yes, I often say the textbook definition of a word, instead of the word, to advance a conversation and fly under people's kneejerk auto-response to the word

cosmodisk• 4 years ago

The problem with money at the top of the food chain is that there aren't that many places to invest. There's plenty of appetite for high risk/high reward, even if people sit on billions.

jiveturkey• 4 years ago

Not a new understanding.

Chamath Palihapitiya talked about this in 2019, and others before then although I don't have references. https://www.youtube.com/watch?v=NVVsdlHslfI Warning, video is self-serving but simplistically, this is part of it. To be clear, the VCs understand what they are doing. They aren't fleecing themselves.

gojomo• 4 years ago

Apparently 'Amundi' is a French asset-manager, roughly Europe's BlackRock or Vanguard.

frozencell• 4 years ago

Europe's largest asset manager.

Amundi warns that parts of private equity market resemble ‘Ponzi schemes’

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