The chair of Norway-headquartered Skagen Funds has voiced concern about the rapid growth of private markets, claiming opaque valuations could lead to a “potential surprise” that hurts investors.
“There’s no doubt there is tremendous opportunity [in private markets], if you get it right and find the right private equity investor, and as a client you understand what you are investing in,” said Tim Warrington, who became chair of the €6.6bn fund management business in December after a six-year stint as its chief executive.
“Part of the issue is that growth has been exponential and not all of the private equity investors are as good as they should be. Transparency is lacking and I wonder why. That opaqueness is unfortunate and can be quite damaging.”
Warrington said he was particularly concerned about “direct investors who are on the edge of institutional”, such as single family offices, who “maybe have not fully thought through the consequences or risks of the private markets exposure they are taking”.
“There will be some unhappy investors. Pricing is a real issue,” said Warrington. “If one is an investor in private equity, you want a level of transparency that gives you comfort and certainty. I worry that the exposure at the lower end of the institutional market is a potential surprise waiting to hurt the industry. I hope the regulators have got that in hand.”
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Some of the biggest names in asset management are expanding their private markets capabilities, including BlackRock, which in January acquired Global Infrastructure Partners for $12.5bn. Amundi, Europe’s largest asset manager, announced on 7 February it had bought Zurich-based private markets specialist Alpha Associates in a deal worth up to €300m.
The push by asset managers into private markets comes as regulators increase their focus on the booming sector.
Financial Conduct Authority chief executive Nikhil Rathi told the watchdog’s annual public meeting in October that it was “very, very focused” on emerging risks in the asset class.
Rathi’s comments came after the Financial Times reported that the regulator was eyeing greater scrutiny of private markets through a review into “disciplines and governance” over valuations, as rising interest rates and worsening economic conditions have increased pressure on private equity firms and the companies in which they invest.
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Meanwhile, the Bank of England said in December that “sharp revaluations” were a vulnerability in the private credit and leveraged lending markets.
According to the Bank, leveraged lending, high-yield bond and private credit markets now make up around a quarter of all market-based finance globally. Private credit has ballooned four-fold since 2015 to reach $1.8tn, but could be “much larger” given the limited availability of data.
In an 11 January letter, the Bank said lenders should “expect ongoing heightened engagement” on private market risks “including targeted requests for enhanced data and analysis”.
Responding to a Freedom of Information Act request from Financial News on 31 January, the Bank said it was still “developing its approach to engagement with firms” so could not provide more information on the kind of questions banks were being asked.
Warrington said he was particularly concerned about the secondary market, where private equity assets are sold between investors.
“There are a lot of investors who shouldn’t be invested in private markets. It’s important to have exposure, but it shouldn’t be for everybody,” said Warrington.
Additional reporting by Justin Cash
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