Amundi warns that parts of private equity market resemble ‘Ponzi schemes’ | Hacker News Reader

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

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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.

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.

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.

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

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

> 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.

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

https://archive.ph/XuEzW

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.

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.

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.

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)

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.

Quite so. I didn't say it was a good thing; read my parethesised affix.

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.

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.

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.

>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.

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).

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.

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?

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

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.

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.

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.

>A ponzi scheme involves a company who has no underlying revenue model and just shuffles money from late investors to early investors.

Which is exactly what Uber has done for 10 years. Revenue has nothing to do with it.

How else do you explain people becoming filthy rich owning companies losing 10s of billions of dollars?

Uber is quite upfront about their revenue/profits. A key characteristic of a Ponzi is that you disguise new investments as revenue/profit.

Uber might be a bad investment but it’s not a Ponzi scheme.

There really does need to be a term beyond SPAC that we can use to describe profitless companies seeking investment.

Googled Uber 2021 Revenue.

> $5.78 billion

>Uber wrapped 2021 with strong revenue growth and greater adjusted profitability. Today

I guess $5.78 billion dollars is pretty close to 0 dollars right ?

Read the only thing that matters, Uber's financial statement to the SEC.[1]

    Revenue from operations: $17,455,000,000
    Loss from operations:     $3,834,000,000

The business model still isn't working.

[1] https://www.sec.gov/edgar/search/#/entityName=UBER&filter_fo...

It's not that I'm not understanding that they aren't profitable. I'm well aware that they aren't profitable. I think Uber is a terrible business. That doesn't make them a Ponzi scheme. A ponzi scheme is defined by the Revenue model, not by profitability. We don't call all unprofitable businesses ponzi schemes because they are unrelated concepts.

That's not what uber has done though

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

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

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.

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

Europe's largest asset manager.

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.

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

how did the low rates create virtual ponzi schemes?

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.

So could QE and this money flooding from central banks become the new trigger for a 2008 repeat?

And then cut taxes

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