Transcript: Is private equity actually worth it?

This is an audio transcript of the FT News Briefing podcast episode: ‘Is private equity actually worth it?’

Marc Filippino
Good morning from the Financial Times. Today is Thursday, March 7th, and this is your FT News Briefing.

[MUSIC PLAYING]

Marc Filippino
The head of Bayer says the company’s not gonna sell new shares anytime soon, and Ghana could lose critical funding because of a controversial new law. Plus, the Norwegian sovereign wealth fund made billions gobbling up shares of public companies. Now it wants in on the private ones too.

Robin Wigglesworth
There’s a whole world of private assets out there, you know, companies that aren’t listed on the stock market. And that’s where private equity plays.

Marc Filippino
I’m Marc Filippino and here’s the news you need to start your day.

[MUSIC PLAYING]

Bayer could probably use some medicine for its giant corporate headache right now. The German drugs and pesticides maker released ugly quarterly earnings on Tuesday, the same day Bayer said it wouldn’t split itself up, and investors punished the company by sending shares down to a 19-year low. Bayer is also apparently ruling out selling new shares. CEO Bill Anderson spoke to the FT and said, “There is zero chance that’s happening”. His key argument is that it would reduce the share value for existing investors. Now, there isn’t a ton of good news happening at Bayer right now. Its patent for a blockbuster drug is expiring this year and it’s dealing with expensive lawsuits related to its weedkiller Roundup, which thousands of Americans blame for giving them cancer.

[MUSIC PLAYING]

Norway’s sovereign wealth fund is worth a cool $1.6tn and it’s grown to that size through public investments. It owns a little bit of every single major listed company in the world, so it might be surprising that a fund that made its name in public markets wants to move into private equity. That is, if the Norwegian government will let it. Here to have a deep philosophical conversation about private equity is the FT’s Alphaville editor, and also Oslo resident, Robin Wigglesworth. Hey, Robin.

Robin Wigglesworth
Hey, Marc. How are things?

Marc Filippino
They’re good. I’m interested, can you just tell us a little bit about Norway’s sovereign wealth fund?

Robin Wigglesworth
Well, so Norway found oil many, many decades ago in the 60s. And, you know, most of the money initially just went into infrastructure, new schools, but they quickly realised they’re gonna have way more money than they could plausibly spend without drying up the value of the krone. So they started an investment fund, squirrelling the money away, first just in bonds overseas and then in stocks as well. And it’s meant that the fund has grown vast. It’s one of the biggest pools of capital in the world.

Marc Filippino
So then what exactly is the fund asking Norway’s government for when it comes to private equity?

Robin Wigglesworth
Well, the Norwegian sovereign wealth fund is essentially one big fat passive index fund that buys everything in the market — all the bonds, all the stocks, and doesn’t really try and pick the best ones. But it can only buy public markets. So what you see on the New York Stock Exchange or the London Stock Exchange. There’s a whole world of private assets out there, you know, companies that aren’t listed on the stock market. And that’s where private equity plays. So the name implies that they buy private companies. And you know, this has become a $5tn investment strategy now. And it’s one of the big things that the Norwegian sovereign wealth fund very noticeably does not do. So they’ve gone to the government and asked if they can add private equity into their investment mandate because they get the mandate from Parliament.

Marc Filippino
And why do they want to make this move into PE, considering how big they are having gotten there through public investment?

Robin Wigglesworth
Well, purely the returns. The headline returns of the private equity industry are incredibly attractive. So on average, in the long run, private equity has generated 3, 4 per cent a year over public markets. And if you’re a big investor like Norges Bank Investment Management, which is its formal name, you know, you don’t mind locking up money for 10 years, which is what you have to do in the private equity fund. So that’s why they think it’s not just that this is an attractive investment strategy. It’s kind of the perfect investment strategy for the oil fund

Marc Filippino
But I got to imagine that it’s not perfect, that there are some drawbacks or at least it’s not as shiny as it’s made out to be.

Robin Wigglesworth
No, I mean, nothing is great as it looks on closer inspection. The reality is that, you know, the private equity industry’s returns need a lot of asterisks to them. The private equity industry charges an ungodly amount of money. And it’s not just the fact that it charges a lot of money. The fees are quite often opaque. So you’d basically be giving up a fairly nice, simple, cheap, transparent model for a bit more opacity, a lot more costs. So you don’t really know exactly what you’re paying for and you see what you get back. And quite a lot of people are happy with that. But actually, what most academics find is that private equity does not do any better than boring old public markets.

Marc Filippino
Robin, we’re having this conversation about the Norwegian sovereign wealth fund. But really, it seems like we’re having a larger conversation about the pros and cons of private equity. I mean, what is your headline takeaway about private equity, which is one of the hottest asset classes out there right now?

Robin Wigglesworth
There are certain very weird, unique characteristics about the Norwegian sovereign wealth fund but a lot of the questions are far broader. And the reality is that private equity is going into a very uncertain era. One of the big things that powered private equity returns over the past 40 years was just falling interest rates. You know, debt is kind of the fuel that kept the private equity engine going. And that fuel essentially became free in 2020-21. Now it’s more expensive. So I think the golden era of private equity is over. And even though investors are still chucking money at the asset class hand over fist, I think there probably will come a slightly more nuanced debate around whether that really does make sense in the same way that we’ve seen in the past.

Marc Filippino
Robin Wigglesworth is the FT’s Alphaville editor. Thanks, Robin.

Robin Wigglesworth
Thanks for having me on, Marc.

[MUSIC PLAYING]

Marc Filippino
Ghana’s economy is in trouble. A few years ago, it defaulted on its external debt obligations and inflation is at 24 per cent. So outside funding from places like the World Bank and the International Monetary Fund are critical for the west African country. But Ghana’s finance ministry thinks those sources could pull back if a controversial anti-LGBT+ law goes into effect. Here to talk to me about it is the FT’s west Africa correspondent, Aanu Adeoye. Hey, Aanu.

Aanu Adeoye
Hey, Marc.

Marc Filippino
All right, so tell me a little bit about this law and what’s included in it and where does it stand right now.

Aanu Adeoye
Yeah. So this is the anti-LGBT law. It’s called the “Promotion of proper human sexual rights and Ghanaian family values bill”. And it essentially expands the criminalisation of same-sex relationships in Ghana. You know, these relationships were already criminalised in Ghana. But what this law does is now recommend prison time. So Ghana’s parliament passed this bill on February 28th. But it’s not law yet. The president still has to sign it. But the president indicated earlier this week that it was going to delay because there’s been a string of legal challenges brought against the bill by civil society groups. And the president says he wants those cases to be resolved first at the country’s Supreme Court.

Marc Filippino
All right. So there’s a lot going on here with this law. How does Ghana’s finance ministry think the World Bank might respond to it?

Aanu Adeoye
So, you know, on the face of it, officially what the World Bank has told us is that this is a bill that has not become law yet. So they’re not going to comment. But, you know, going with precedents, last year when Uganda, this east African country, passed a much more stringent anti-LGBT+ law, the World Bank said it would not consider any new funding for Uganda. So going by this, there’s concerns that the World Bank might pull funding for Ghana. And, you know, the country is set to receive about 3.8bn from the World Bank over the next five to six years. And Ghana’s finance officials are worried that if the president signs this law, that they would lose this critical funding that is important for the economy.

Marc Filippino
I guess I’m wondering Aanu — and I know that there’s no clear answer to this — but is it the place of the World Bank to withhold funding because it doesn’t agree with a country’s domestic legislation?

Aanu Adeoye
That’s a question that many people on the continent are asking. You know, there’s even the term of human rights imperialism, so to say, of western countries and western entities imposing their own social values on African countries. And people are saying, you know, why do we have to live by what these guys are saying? On the other hand, the finance ministry memo is urging Ghana to essentially diversify its sources of funding and saying Ghana should try and embrace conservative countries. You know, China over the last 20 or more years has increasingly been a big player on the African continent. And the reason why China has become popular is because unlike western countries, they do not have strings attached like, say, democratic values or human rights values. So that could be a model, especially in a world that is fracturing into different, you know, leadership groups with their different approaches to how they see the world.

Marc Filippino
Aanu Adeoye is the FT’s west Africa correspondent. Thanks, Aanu.

Aanu Adeoye
Thank you for having me.

[MUSIC PLAYING]

Marc Filippino
Before we go, it’s a huge week for US politics. President Joe Biden will give his State of the Union address tonight. He and his Democratic party are trying to reverse low-polling numbers ahead of November’s presidential election. Meanwhile, Donald Trump basically became the Republican presidential nominee this week. His last main rival, Nikki Haley, called time on her presidential campaign after losing several primary elections on Super Tuesday. We’ll have more on the 2024 US election in our Swamp Notes podcast, which comes out on Saturday and every Saturday. It’s right here in this feed, so just stay tuned. You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

[MUSIC PLAYING]