Jeremy Grantham has no love for private equity. The GMO founder and veteran value investor has branded this type of investment ‘a license to steal’ during the recent low-rate environment, while expounding the virtues of venture capital.
In an extract from an exclusive interview with Citywire, Grantham said he wanted investors to be much clearer when defining ‘alternative’ ideas in portfolios, as the grouping of later stage private equity and venture capitalism was frustrating.
‘I want to divide alternatives between classic private equity – buyouts, etc – and venture capital. Private equity is shuffling the same paper that institutional investment managers do. It adds very little value and leverages the system up.’
‘It was a license to steal as long as the rates were coming down. Over the last few years, where debt after inflation was practically free, how could you not make money buying a company and leveraging it with free debt and holding, or reselling it?
‘It didn’t really matter. The business boomed and has become a very big chunk – about a quarter of the entire market cap.’
Grantham said the changing market environment – notably central banks raising rates – would be ‘life threatening’ to the highly leveraged models of many private equity investors. He said this would be incredibly problematic if rates reversed to levels seen during the 20th century.
Conversely, Grantham said venture capitalism is hugely important. ‘Venture capital is where there are new ideas, the innovations, and we need innovation like mad to green the economy and to get around bottlenecks.
‘Just take, for example, lithium, cobalt, nickel, copper – the things you need to green the system. They are not available in anything like the quantities that we need and we are going to have to redesign batteries, redesign storage systems, redesign electric vehicles.
‘You’re going to have to have a beehive of innovation to design your way around these bottlenecks, so venture capital will be our saving grace. America does it very well indeed and it’s the best part of American capitalism, which is otherwise monopolistic, fat, happy and not that good.’