Forget about crypto, the next big scam is… private equity! Or so say industry leaders.

“The private equity industry has grown into a pyramid scheme that will create casualties in around three to five years”, said Vincent Mortier, the CIO of Amundi, Europe’s biggest asset manager, in June 2022.

“What you see is that the vast majority of deals currently are being done between private equity firms. One private equity firm will sell to another who is happy to pay a high price as they have attracted a lot of investors.

“The bulk of deals are like this”, warned Mortier.

“You know you can sell [assets] to another private equity firm for 20 or 30 times earnings. That’s why you can talk about a Ponzi. It’s a circular thing”, he said.

Private equity firms engage in businesses whose value is far more difficult to discern, as opposed to asset managers who invest in public share and bond markets where prices can be watched in real time.

Usually, private equity firms use a combination of discounted future earnings and comparisons to the valuations of comparable, publicly traded companies to estimate the value of these enterprises.

Private equity firms have incentives to transfer assets amongst one other at inflated prices, Mortier noted.

He added a word of warning. “There are some very, very good opportunities, but there are no miracles. Eventually there will be casualties, but that might not be for three, four or five years.”

And he is not the only one making such kind of statements.

In September 2022, the FT quoted Mikkel Svenstrup, a top executive at Denmark’s largest pension fund, again comparing the private equity industry to a pyramid scheme, warning buyout groups are increasingly selling companies to themselves.

“Obviously we’ve been looking very carefully at . . . who’s been tweaking [returns figures by] using bridge financing, leveraged funds . . . all those tricks they do to kind of manipulate the IRR [Internal Rate of Return],” Svenstrup said.

Also, wizardry at the private equity industry is something the financial press has been reporting on since the pandemic.

Pyramid schemes, manipulation of IRRs… said by the industry players themselves!

Even if this sort of statements, taken literally, should be viewed with some degree of skepticism, they will perhaps transform into legal battles in the (near) future. We have been warned.