Whether valuations fall suddenly or gradually, the industry is due for a reckoning, and the consequences for the economy are dire.
Markets today pose a new existential question: Can there be a bubble in something if it has no price?
As a believer in efficient-ish markets, I am uncomfortable calling anything a bubble. Recognizing a bubble requires spotting an asset or asset class that is objectively overvalued before everyone else does. Making this determination is almost always impossible in real time, even if it’s screamingly obvious in hindsight. And that’s in public markets, where prices are easily observed and constantly updated as investors form views and incorporate information.
Sometimes, however, you get an inkling that something isn’t right — and lately I am feeling that about private markets, especially private equity, even if there are no prices that can collapse or be inflated.
There are several reasons to worry the private equity market is due for some sort of reckoning. Over the last few decades, private markets were flooded with money. Institutional investors — under pressure to achieve high returns, especially in a low-rate environment — turned to private markets that promised high future returns and attractive current valuations (though these were impossible to verify or dispute). In 2023, the value of North American private equity assets under management was estimated to be $3.5 trillion, more than 10 times what it was two decades earlier.
Continue reading the entire piece here at Bloomberg Opinion (paywall)
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
Photo by Robert Daly/Getty Images