Side Letter: PE and the Ponzi scheme; Oregon’s denominator decision

Private equity's predilection for selling to itself has led to an unflattering comparison with Ponzi schemes. Plus: How Oregon plans to deal with the denominator effect and what CDPQ considers its sweet spot. Here's today's brief, for our valued subscribers only.

Just happened

Is PE a Ponzi scheme?
No, it is not. But some deals resemble “Ponzi schemes”, according to Amundi CIO Vincent Mortier, it was reported last week. To be clear: a Ponzi scheme is a fraudulent scam that involves paying existing investors with money from new investors. Mortier’s unflattering view of “parts” of the private equity market was based on the idea that “the vast majority of deals currently are being done between private equity firms”, he reportedly said, adding: “One private equity firm will sell to another who is happy to pay a high price as they have attracted a lot of investors. The bulk of deals are like this.”

Mortier could be forgiven for assuming that PE firms are more likely to trade among themselves at a time when IPOs are less attractive exit routes and many of the largest firms are sitting on freshly raised mega-funds that need deploying. But secondary buyouts hardly account for the “bulk” of PE deals: data from law firm White & Case shows that transactions in which PE firms sell to one another account for just 7.3 percent of global PE deal value so far this year, significantly lower than the 14.7 percent recorded throughout 2021 and 18.1 percent in 2020. While half-year totals cannot directly compare with full-year statistics, they do suggest that the PE industry isn’t exactly cannibalising itself.

The Amundi CIO’s comments have triggered some lively debate on LinkedIn,, with this one by academic and consultant Cyril Demaria catching our eye.

Dealing with the denominator
What should investors do when hit with the dreaded denominator? Cut ticket sizes? Shop a chunk of your portfolio on the secondaries market? Turn down re-ups? In Oregon Public Employees Retirement System‘s case, the answer is: not much. The pension’s PE exposure rose to more than 27 percent in Q1 2022, making it the largest asset class within the fund, our colleagues at Buyouts report (registration required). The denominator effect – where a sharp drop in listed equities portfolios leaves illiquid holdings above their allocation limits – has led some pension systems, such as the Wisconsin Investment Board, to approve various measures to combat its effects. Oregon, however, is holding fire as it believes PE valuations will fall in the coming months.

“We should expect those numbers to come down in the second quarter, given the difference in the market environment,” said Paola Nealon, principal at Meketa, Oregon’s investment consultant. The outperformance of PE during 2021 had already pushed LPs over their allocation limits, just as a raft of managers was returning to market asking for bigger cheques. “The result of all of that is a bit of indigestion in the market,” TPG’s chief financial officer Jack Weingart said on a recent earnings call.

Essentials

CDPQ’s shopping list
What does one of the world’s most sophisticated institutions want from its PE transactions? Significant minority and control at a sweet spot of $300 million. That’s the shopping list for the Canadian investor Caisse de dépôt et placement du Québec, PE head Martin Laguerre tells Bloomberg (subscription required).

Direct investments now make up more than 75 percent of its C$82 billion ($65 billion; €61 billion) PE portfolio and, sweet spot aside, the institution has the flexibility to participate in the $75 million to $150 million range for VC and growth equity. Such manoeuvrability could prove a competitive advantage at a time when fundraising is heavily congested and allocations are at risk of being tied up in mega-funds of similar vintage and strategy, as Side Letter noted last month. For more insight into how CDPQ is approaching PE, check out PEI‘s interview with head of Europe Albrecht von Alvensleben from November.

Chicago’s new CIO
The $13.1 billion Chicago Teachers’ Pension Fund has appointed Fernando Vinzons as CIO, effective from 11 July, per a Friday statement. Vinzons was most recently director of investments at Cook County Employees’ & Officers’ Annuity & Benefit Funds, another $13 billion pension from Illinois. He brings more than 18 years of expertise, including four years as director of investments and 10 years as a senior member of the Cook County investment team.

Vinzons has influential shoes to fill in replacing Angela Miller-May, who left the pension in July to join Illinois Municipal Retirement Fund as its CIO. Chicago Teachers’ has a roughly 5 percent allocation to PE, of which nearly half is now with managers owned by minorities, women and people with disabilities, Miller-May told PEI last year.

Dig deeper

LP meetings. It’s Monday, so here are some LP meetings to watch out for this week.

6 June

8 June

9 June

10 June


Today’s letter was prepared by Alex Lynn with Adam LeCarmela Mendoza and Helen de Beer