Private equity ain’t all it’s cracked up to be + the words we tripped over in 2021
Private equity isn’t quite as lucrative as it claims to be: Far from its heyday in the 1990s, private equity is struggling to outperform equities as covid stimulus inflates the markets and corporate valuations rise, argues New York Times columnist Michelle Celarier. Claims of super-sized returns have made the industry one of the most popular places for institutional players — and increasingly retail investors — to park their money, helping firms to acquire almost USD 850 bn in dry powder. But research shows that returns on PE investments have been on the long-term decline, falling from an estimated 15% two decades ago to just 1-5% over the past 10 years, having never made a complete recovery from the financial crisis in 2008-09.
A lot for a little: Investments in US private equity funds formed between 2006 and 2015 could have been matched by investing in an equity index fund, according to a 2020 research paper out of Oxford’s Saïd Business School. Over the same time, investors shelled out at least USD 230 bn in management fees to PE firms. “The big picture is that they’re getting a lot of money for what they’re doing, and they’re not delivering what they have promised or what they pretend they’re delivering,” Ludovic Phalippou, professor of finance at the Saïd Business School and author of the report, told the NYT.
Gaming the numbers? There’s no way to verify returns from a PE fund until it is liquidated, typically after a 10-year lifespan. In the interim, investors must rely on a fund’s self-reported annual internal rate of return (IRR) figures, which PE critics including Phalippou say is easily gamed for a sunnier outlook. For example, if a 10-year PE fund sells an asset early on in its timeline, the return from the sale will be reflected in the IRR — but investors can’t be sure that the capital gained can be reinvested at the same high rate until the fund liquidates. Borrowing extra liquidity early in a PE fund’s lifetime can also boost annual returns by as much as 3%, according to estimates from investment and advisory firm Cambridge Associates.
SPACs aren’t dead: SPACs are on course to outnumber traditional IPOs in the US this year, according to Dealogic data picked up by Axios. Some 562 blank-check firms went public on US exchanges between January and November this year, compared to 373 companies that went the normal route. Traditional issuers tended to raise more money though: in total, SPACs raised only USD 3 bn more than normal IPOs, despite significantly outnumbering them.
The year was top-heavy for SPAC issuances, with the first quarter seeing a boom in popularity for the previously-obscure vehicles. Despite the subsequent plunge in the number of blank-check firms going public, traditional IPOs have been unable to catch up, and a recent resurgence has left Axios to conclude that SPACs are “here to stay as a viable IPO alternative.”
But they are coming under a watchful eye: Two high-profile SPACs are now under the investigation of federal regulators in the US, in the latest sign that blank-check firms are still struggling to throw off a slightly shady reputation. Former US President Donald Trump’s Digital World Acquisition Corp. (DWAC), which is set to merge with the company running his new social media venture “Truth Social,” has been asked to share stock trading information and communications with authorities, the company revealed in a regulatory filing (pdf). The news comes days after Trump’s SPAC announced it had raised USD 1 bn from institutional investors. Meanwhile, Churchill Capital Corp IV, which raised USD 4.4 bn in one of the largest SPAC transactions in history when it merged with electric car maker Lucid earlier this year, is being probed over disclosures and forecasts it made while listing, according to the Financial Times.
What do Omicron, Ethereum and Billie Eilish have in common? They all rank among the words most mispronounced on TV in 2021, not quite rolling off the tongue as newscasters would like them to, according to a list commissioned by language learning app Babbel from the US Captioning Company. (In case you’re wondering, it’s OH-mee-kraan, ih-THEE-ree-um and EYE-lish, standup comedian and Babbel Live teacher Esteban Touma tells Bloomberg).
The Ever Given also got a special mention, with newscasters repeatedly mistaking the name of the ship that got stuck in the Suez Canal in March for Evergreen, the vessel’s owner. Other words that made the list include dog-themed cryptocurrency Dogecoin (DOHJ-coin), Chinese fast fashion retailer and viral trend-setter Shein (SHEE-in), the Korean dessert Dalgona (tal-goh-NAH), popularized by Netflix’s Squid Game, and Cheugy (CHOO-gee), a term used among Gen Z to mock millennials’ outdated aesthetic.