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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
If at first you don’t succeed, try again. And again. And again.
So far, the Norwegian government has been asked whether it would place some of its vast pot of national oil-derived wealth in to private equity no fewer than four times. It has said no each time, most recently in April. I bet you a box of those yummy chocolate hearts from Oslo airport that the government considers the matter again before too long.
For big investors — and at $1.6tn, Norway’s oil fund certainly counts — private markets are simply becoming too big to ignore. They have to put the money somewhere, and the universe of listed stocks in the US has halved from about 8,000 at the start of the century. The UK has lost around a quarter of its listed stocks in a decade.
Meanwhile, from a standing start of close to zero in the year 2000, global private debt markets have exploded to a total of $2.1tn, according to the IMF. Europe is about a decade behind the US, where private credit is comparable in size to the country’s leveraged loans and high-yield bond markets — established fixtures on mainstream investors’ menus.
For years, fund managers toiling away in straightforward bonds and stocks have looked at these markets with puzzlement verging on disdain, often suggesting they are a fleeting phenomenon and knock-on effect of the post-2008 cheap money area that is now dying.
Sceptics can also easily cherry-pick scare quotes from the old guard of financial markets to justify keeping a wide berth. Private credit, for example, exhibits “fragilities” and is “opaque and highly interconnected”, as the IMF noted prominently in its recent global financial stability report. “If fast growth continues with limited oversight, existing vulnerabilities could become a systemic risk for the broader financial system.” That’s fair, but “could” is doing a lot of heavy lifting there. As the report also notes, those risks now appear “limited”.
Private credit industry insiders crow that it was the public, not private corporate debt markets that needed a rescue from the US Federal Reserve in the Covid crisis, and even bankers who launch public corporate bonds for a living accept that their counterparts in private lending frequently step in to fill the void in stressed market conditions. Despite some skirmishes, the two live side by side.
Smooth-talking private market industry insiders are now making an increasingly convincing case that holdouts are running out of reasons to refuse to engage.
Seemingly undeterred by the latest “thanks but no thanks” to the asset class from Norway’s government, Marc Rowan, chief executive of Apollo Global Management, spoke at an investment summit hosted by the oil fund’s chief Nicolai Tangen last week.
As a co-founder of one of the world’s most notable alternative asset managers, Rowan was clearly talking his book. But he made some good points. Private markets, he noted, often generate suspicion because they are clunky to trade. Investors who buy them know that it’s hard to get out again in a hurry. They lack an easy way to see how their portfolio is performing day-by-day, let alone minute-by-minute.
But is that so bad? And is it really so simple to hop in and out of public markets? “I don’t think so,” Rowan said. Stocks, sure. But as any trader will tell you, bond markets have become more unwieldy since the crisis of 2008, as banks have chosen or been forced to recoil from taking on risk and facilitating transactions. The result, Rowan said, is that it can now easily take five days to sell even a highly rated corporate bond from outside the top-20 issuers.
Meanwhile, stock markets have become so lopsided in favour of a clutch of gigantic US companies that private equity, for all its faults (and fees), does make sense as a source of diversification and an escape from the distortions that come from tracking indices.
Take for example the top-10 US stocks, which dominate the market and trade at enormous 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 price-to-earnings stocks? Probably none . . . I grew up thinking public is safe, private is risky. We are all going to have to overcome [these biases].”
Public markets are not going away. Stock and bond prices will remain the primary way for investors to assess the health of individual companies or of national economies. But investors waiting for private markets to implode in to irrelevance are starting to sound like those who believe passive index-tracking investment is a fad. Big asset managers are shifting towards figuring out how to do this right, not whether to do it at all.
