Yes

Has Private Equity Become a Ponzi Scheme?

—UnHerd

This has been another episode of simple answers to simple questions.

More seriously, the way that private equity conducts business is indistinguishable from fraud:

The economist Hyman Minsky’s name can once more be heard in ominous whispers around Wall Street. Private equity firms have recently been undertaking such funny financial manoeuvres that those who invest in the funds have had to put a stop to it. With private equity markets depressed, fund managers have been taking on so-called net asset value (NAV) loans to pay their investors’ dividends. Far from being happy to get their money, investors realised that the funds they had invested in were borrowing from Peter to pay Paul, and told them to cut it out.

In his stellar 1992 paper “The Financial Instability Hypothesis”, Minsky argued that there were three types of borrowing which corporate entities engaged in. He called these: hedge, speculative, and Ponzi. Hedge financing involves loans which are taken on, typically for business operations, and can then be paid back using a company’s cash flows. Speculative financing describes loans usually taken on to invest in the company, which can then ideally be paid off by the future cash flows generated by the new investment. Meanwhile, Ponzi financing refers to loans taken out by desperate companies which use them to simply pay interest on previous loans.

Minsky argued that when Ponzi financing units became predominant in an economy — or in part of the economy — this indicated that a financial crisis was brewing. The clue is in the name: a Ponzi scheme is upheld only through finding more and more people to pay up in the promise of money that is itself a result of convincing more and more people to pay up. It is hard not to see in private equity’s use of NAV loans to pay off dividends a classic Ponzi-financing regime.

Private equity’s entire model is based on Minsky’s concept of speculative financing. Fund managers buy up companies and then load them up with debt. This debt is typically used to drastically increase investment in the companies — and in doing so grow them and produce returns for investors. This carries risks. If too many of the investments go bad, the fund might go bankrupt and investors might pull out. There is more than a little speculation that the NAV loans signal that much of the sector has already gone bad and is engaged in increasingly funny tricks to try to cover it up.

………

There are also questions surrounding the links between private equity investing and the property markets. After the 2008 crisis, the central banks and regulators said: “Never again”, and imposed strict regulations on bank lending. When we look at mortgage-lending data, we see that banks are not providing the credit for the current rise in house prices — leading to suggestions that it might be the so-called “shadow-banking” sector of private equity and hedge funds which is driving the market.

If the current murmurs proves correct, this could all collapse in a Minsky moment reminiscent of 2008, but with private equity and hedge funds responsible rather than the banks. Pension funds would be affected, but so would banks allocating capital to the private equity sector. If this scenario were to play out, expect there to be bailouts just as there were in 2008. The central banks and the regulators may have said “Never again”, but speculative credit, like life, tends to find a way.

The regulators never said, "Never again," they, specifically timothy "Eddit Haskell" Geithner said, "Foam the runway," and Barack Obama, said, "My administration is the only thing between you and the pitchforks."

The regulators said, "Don't worry, no matter how badly you broke the law, no one is going to jail, and no matter how incompetent you are, you will still have a job, except, of course for the scapegoats at Lehman."

Less than 2 decades later, we are on a path to repeat the mistakes that Obama made.

And they wonder why people are drawn to an spray tanned fraud who promises to burn it all down.