I have read Robert Armstrong’s piece “Private equity is facing a new financial regime” (On Wall Street, FT Weekend, March 29) and I agree with most of it. Armstrong provides a very good analysis of the challenges that have recently affected private equity. I would like to advocate on behalf of private equity and, more broadly, for private markets.
There are studies that demonstrate how over the long term — say 20 years — private equity investments have consistently outperformed public markets (ie delivered superior returns). This indicates that investors have nonetheless been compensated with an illiquidity premium and a genuine (rather than apparent) uncorrelated return. Furthermore, private investments can be made not only in the primary market but also in the secondary market.
In periods such as the current one, when many investors seek to liquidate their positions, this offers significant opportunities to acquire assets at discounted prices. Moreover, the success of private debt may suggest that companies have been overly financed by equity, and that there has been insufficient debt utilisation.
It is also worth noting that private debt is capable of generating favourable returns with low volatility, even during periods characterised by prolonged higher interest rates.
The superior returns of private equity are not solely attributed to financial leverage but also, and more importantly, to the ability to acquire an undervalued company, manage it efficiently to create value, and subsequently sell it at a higher price that reflects this “additional” value.
Of course when Armstrong assesses that “what we have seen in the past few years are the stresses and strains of private equity adjusting to a new world”, that is definitely true, as is the fact private equity will succeed in not only adjusting but also prevailing in this new world.
Gianluigi Di Pietrantonio
Varese, Italy
