7 ms·

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

82 points by haasted 4y ago

dislikedtom 4y 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.
- mym1990 4y 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.
  - zasdffaa 4y 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)
    - deleted 4y ago
      [deleted]
    - zdkl 4y ago
      And that's how you get less informed private persons (ie. the public, ie. the "economy") over-leveraged on real-estate or junky assets holding the bag.
      - zasdffaa 4y ago
        Quite so. I didn't say it was a good thing; read my parethesised affix.
    - mym1990 4y ago
      In theory sure, but it has been proven over and over and over that it is incredibly difficult to time the market and some people who do this will get burned. Also, people become incredibly greedy in these situations, they think they will be able to get out of the game but keep going back for more.
- mettamage 4y 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.
- clairity 4y 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 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.
  - itsoktocry 4y 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.
    - clairity 4y ago
      yes, you're right. i misread the title and didn't originally read the article because it was behind a paywall, but just saw the archive link and read through it now. i think a similar dynamic happens in PE though, which is a private market, but a very large one, so not like the illiquid, opaque private markets we'd otherwise imagine. PE firms try to inflate valuations and get out while leaving others holding the bag (i.e., take the inflated risks and therefore take the eventual losses).
- tootie 4y 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 4y 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 4y ago
  No? But maybe a qualified No that varies over time. https://www.bbc.com/news/magazine-26680993 https://www.bbc.com/news/magazine-26680993
- dwallin 4y 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.
- Animats 4y 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.
  - Wohlf 4y ago
    Don't social safety nets and pensions also meet this definition?
    - cuteboy19 4y ago
      No it's like insurance, you are paying a premium for reduced risk. It should not been seen as an investment but rather as a service you pay for. So the question becomes 'worth it or not' instead
    - jandrese 4y ago
      In theory pensions should be paying out what you payed into them. It's basically a bet that you will die before you pull out more than you put in (plus whatever interest/gains was made on your money). Social Security is more like a Ponzi scheme in that it pays out retirees based on current income. There are some savings, but it was always a more or less direct payment of the old from the working age. The only thing that keeps it from being a Ponzi scheme is that they aren't pretending that it's some magical money making scheme that is generating "returns" to pay out to the early investors. The accounting is all front and center. IMHO for something to qualify as a Ponzi scheme there must be a form of deception involved. Investors must think that they are realizing outsized returns and not because they are in on the scam. Obviously the guys at the top know it is a scam, but the vast bulk of the participants must be kept in the dark to keep it running.
zeruch 4y 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.
- clairity 4y 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 4y 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 4y ago
  PE might be unsavory but I don't see how it is a ponzi scheme.
thedudeabides5 4y ago
What else do you expect when you hold rates at 0 for the better part of a decade.
- jjtheblunt 4y ago
  how did the low rates create virtual ponzi schemes?
  - jandrese 4y 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.
    - DoingIsLearning 4y ago
      So could QE and this money flooding from central banks become the new trigger for a 2008 repeat?
- fundad 4y ago
  And then cut taxes
anm89 4y ago
https://archive.ph/XuEzW https://archive.ph/XuEzW
yieldcrv 4y 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
- jandrese 4y 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.
  - yieldcrv 4y 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 4y 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 4y 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 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 4y ago
Apparently 'Amundi' is a French asset-manager, roughly Europe's BlackRock or Vanguard.
- frozencell 4y ago
  Europe's largest asset manager.

82 points by haasted 4y 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.

mym1990 4y 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.
- zasdffaa 4y 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)
  - deleted 4y ago
    [deleted]
  - zdkl 4y ago
    And that's how you get less informed private persons (ie. the public, ie. the "economy") over-leveraged on real-estate or junky assets holding the bag.
    - zasdffaa 4y ago
      Quite so. I didn't say it was a good thing; read my parethesised affix.
  - mym1990 4y ago
    In theory sure, but it has been proven over and over and over that it is incredibly difficult to time the market and some people who do this will get burned. Also, people become incredibly greedy in these situations, they think they will be able to get out of the game but keep going back for more.
mettamage 4y 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.
clairity 4y 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 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.
- itsoktocry 4y 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.
  - clairity 4y ago
    yes, you're right. i misread the title and didn't originally read the article because it was behind a paywall, but just saw the archive link and read through it now. i think a similar dynamic happens in PE though, which is a private market, but a very large one, so not like the illiquid, opaque private markets we'd otherwise imagine. PE firms try to inflate valuations and get out while leaving others holding the bag (i.e., take the inflated risks and therefore take the eventual losses).
tootie 4y 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 4y 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 4y ago
No? But maybe a qualified No that varies over time. https://www.bbc.com/news/magazine-26680993 https://www.bbc.com/news/magazine-26680993
dwallin 4y 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.
Animats 4y 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.
- Wohlf 4y ago
  Don't social safety nets and pensions also meet this definition?
  - cuteboy19 4y ago
    No it's like insurance, you are paying a premium for reduced risk. It should not been seen as an investment but rather as a service you pay for. So the question becomes 'worth it or not' instead
  - jandrese 4y ago
    In theory pensions should be paying out what you payed into them. It's basically a bet that you will die before you pull out more than you put in (plus whatever interest/gains was made on your money). Social Security is more like a Ponzi scheme in that it pays out retirees based on current income. There are some savings, but it was always a more or less direct payment of the old from the working age. The only thing that keeps it from being a Ponzi scheme is that they aren't pretending that it's some magical money making scheme that is generating "returns" to pay out to the early investors. The accounting is all front and center. IMHO for something to qualify as a Ponzi scheme there must be a form of deception involved. Investors must think that they are realizing outsized returns and not because they are in on the scam. Obviously the guys at the top know it is a scam, but the vast bulk of the participants must be kept in the dark to keep it running.

zeruch 4y 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.

clairity 4y 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 4y 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 4y ago
PE might be unsavory but I don't see how it is a ponzi scheme.

thedudeabides5 4y ago

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

jjtheblunt 4y ago
how did the low rates create virtual ponzi schemes?
- jandrese 4y 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.
  - DoingIsLearning 4y ago
    So could QE and this money flooding from central banks become the new trigger for a 2008 repeat?
fundad 4y ago
And then cut taxes

anm89 4y ago

https://archive.ph/XuEzW https://archive.ph/XuEzW

yieldcrv 4y 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

jandrese 4y 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.
- yieldcrv 4y 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 4y 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 4y 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 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 4y ago

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

frozencell 4y ago
Europe's largest asset manager.