Private equity may become a ‘pyramid scheme’, warns Danish pension fund

A top executive at Denmark’s largest pension fund has compared the private equity industry to a pyramid scheme, warning buyout groups are increasingly selling companies to themselves and to peers on a scale that “is not good business”.

Mikkel Svenstrup, chief investment officer at ATP, said he was concerned because last year more than 80 per cent of the sales of portfolio companies by the private equity funds that ATP has invested in were either to another buyout group or were “continuation fund” deals, where a private equity group passes it between two different funds that it controls.

“We’re a big fund investor, we have hundreds of funds and thousands of portfolio companies,” he said. “This is not good business, right? This is the start of, potentially, I’m saying ‘potentially’, a pyramid scheme. Everybody’s selling to each other . . . Banks are lending against it. These are the concerns I’ve been sharing.”

ATP is a major investor in private equity funds. It has $119bn under management and has committed money to 147 buyout funds, according to PitchBook data.

Svenstrup’s comments, made at the IPEM private equity conference in Cannes, are similar to those made by Amundi Asset Management’s chief investment officer Vincent Mortier in June. Mortier said some parts of the private equity industry “look like a pyramid scheme in a way”.

Svenstrup said the “exponential growth” of the private equity industry in recent years, as investors have poured cash into its funds, would stop “at some point”, adding that this was “just a question of time”.

“It’s not that I think the private equity market is going to drop off a cliff,” Svenstrup said. “We’re just going to be looking [at] potentially low returns and high costs.” He added that the industry played an important role as “a key driver of taking some companies from one step to the next and eventually hopefully getting IPO’d or owned by some long-term owners”.

ATP is cutting down on the number of private equity groups it commits money to, he told the conference.

“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,” he said. IRR, or internal rate of return, is a key measure by which private equity groups report returns to their investors.