| A simple gloomy model you could have of private equity is: - Once upon a time, companies were mispriced. Lots of companies were available cheaply. Their price didn’t reflect the present value of their cash flows, or at least, it didn’t reflect the present value of the cash flows they could reasonably achieve if you added some leverage and improved their management.
- A few ambitious risk-seeking entrepreneurs noticed this systematic mispricing and set out to fix it. They raised money from friends and family and patient investors who were willing to take risk, they bought companies at low prices, levered them up, fixed their operations and resold them after a few years at higher prices.
- It helped, in doing this business, that interest rates were declining for decades and valuation multiples were rising. If you bought a company, did nothing to it, waited five years and sold it, you’d have a profit just from valuation tailwinds.
- The people who started this business — private equity — made great returns for their investors and became billionaires themselves.
- This attracted many, many more people to the business. Who wouldn’t want to become a billionaire by buying and selling companies? Who wouldn’t want to invest with them?
- So now private equity is the default career path for smart ambitious people entering the financial industry, and private equity firms are now giant alternative asset managers with hundreds of billions of dollars under management.
- Why would companies be mispriced?
Like: There was an arbitrage, and correcting it made people rich, and now it is corrected, so correcting it can no longer make you rich. If you want to buy a good company, lever it up, improve its operations and sell it back to the public markets: - Other private equity firms have already bought most of the good companies;
- The companies that are left have all levered themselves up and hired consultants to improve their operations, like a private equity firm would have done, so there’s no reward to you for doing that;
- Interest rates have gone up, so borrowing money is more expensive now than it was a few years ago; and
- Other private equity firms own tons of companies that they want to sell, so you have to compete with them when you try to sell your company back to the public markets, and you won’t get a premium price.
In the golden age of private equity, private equity ownership was an exception, a way to move companies from a low-value state to a high-value state. In 2025, private equity ownership is almost the norm: Huge chunks of modern business are owned by private equity funds rather than public shareholders. It would be a little weird if those private equity funds could all sustainably get much higher returns than public shareholders. We have discussed this model a few times before, including when we discussed KKR & Co.’s move into “strategic holdings,” where instead of buying companies, gussying them up and quickly flipping them for a huge profit, it would just buy companies forever and compound their growth. Not an arbitrage, just owning some companies. I suppose the natural endpoint of this is a complete leveling, where “being owned by private equity” and “being owned by public shareholders” are essentially equivalent: In each category you’d get the same sorts of companies with the same sorts of capital structures and the same sorts of operations. Also, why not, the same ultimate owners. We have talked a lot about the push to get ordinary investors’ retirement savings into private assets. If private equity is just a normal way to own companies, you would expect “being owned by private equity” to mean, ultimately, “being owned by ordinary investors in their 401(k)s.” This is in part because individual retirement savings are a big source of cash, and as private equity gets big enough it will require all the biggest sources of cash. But it is also in part because individual retirement savings are, like, the most normie source of cash. People’s 401(k)s are the last place you would expect to find a ton of differentiated alpha. In the beginning, when private equity was a novel risky arbitrage to correct systematic mispricing of companies, it was funded by sophisticated investors who could understand and appreciate that bet. If private equity is just “owning companies,” it will be funded by everyone’s retirement savings. Anyway Bloomberg’s Allison McNeely, Preeti Singh and Laura Benitez report on gloomy times for private equity: After a half-century of meteoric growth, buyout firms are facing challenges at every step of their life cycle: Attractive takeover targets are scarcer, financing costs are up and it’s harder to cash out old investments and deliver the robust returns once promised to pension managers, endowments, foundations and wealthy individuals. Even dealmakers are frustrated — waiting to collect their share of profits known as carried interest that comes when investments are successfully wrapped up. … “Private equity has lost its way and has to go back to what this industry — that employs the brightest and best minds — does best,” Orlando Bravo, managing partner of private equity firm Thoma Bravo, said in an interview. That’s “buying and selling companies and generating great returns for its investors.” … “Many PE firms are dead already, they just don’t know it,” said Charles Wilson, senior vice president of investment management at industry recruiter Selby Jennings. “Survival will likely hinge on how forgiving managers find their LPs to be when they hit the fundraising trail again in coming years.” The troubles follow a long, high-flying era. For more than a decade, rock-bottom interest rates and cheap financing helped firms scoop up businesses, re-engineer their finances and then unload them at lofty valuations. But when the Federal Reserve started hiking borrowing costs in 2022, the industry got stuck — unable to exit holdings at the prices and returns they had been touting in marketing pitches and updates to clients. … Privately, many institutional investors concede that their expectations from private equity investments are muted for the next decade compared with the previous 10 years. Perfect time to, uh, sell private equity to retail? The pullback by institutions has private equity firms hunting for new sources of capital, such as wealthy brokerage customers. Apollo, Blackstone Inc. and KKR are among those forming partnerships with traditional asset managers and launching products that can be sold to retail investors. … The pitch is that private equity can outperform public markets with less volatility. Mentioned less often is the trouble institutional investors have experienced getting their money back, shifting their focus to distribution metrics. To be fair, though, the boom was really nice while it lasted: “When some of these managers become big, there is a sort of arrogance that creeps in and they really don’t care that much about LPs anymore,” [Arizona public pension manager Mark] Steed said. “In our reference checks, we also find that partners who created value when they were on their funds No. 2 or 3 are on their yachts and not involved in the day-to-day.”
The point of getting into private equity is to get the yacht! Or it was. Now things are harder. It would be sad to think that private equity has bought all the yachts it is ever going to buy. Well here’s one important difference between public and private markets. If you want to bet on the artificial intelligence boom, you can buy stock in Nvidia Corp., which is in various ways likely to profit from that boom. A lot of people have the same idea, though, so the market to buy Nvidia stock is competitive. You’ll have to pay like $183.61 per share for Nvidia (based on yesterday’s close), which is a lot, up more than 1,350% over the last five years. Or you can buy stock in “Decagon AI Inc., a two-year-old startup developing artificial intelligence tools for customer service,” which also seems like a promising AI company. A lot of people have this idea, too, though, so it is also very competitive to buy Decagon stock. But Decagon is a private startup, so that competition is not mediated by price. Bloomberg’s Kate Clark reports: All four of Decagon’s funding rounds, totaling more than $230 million, were preempted, meaning firms like Andreessen Horowitz offered to invest before the company started fundraising. Now, just three months after a round that valued it at $1.5 billion, Decagon is fielding unsolicited offers at valuations as high as $5 billion, according to people familiar with the matter. … Jesse Zhang, the 28-year-old co-founder and chief executive officer of Decagon, says investors hoping to back him have offered him everything from tickets to Golden State Warriors games to an autographed poster of MMA legend Khabib Nurmagomedov. One investor even folded origami cranes into a mosaic of Decagon’s logo, and hand-delivered it to the company’s San Francisco office with a term sheet hidden inside. Decagon took the deal. “Investors are emailing term sheets, they’re giving verbal offers, they’re inviting founders to sport games, they’re inviting founders to race Ferraris and they’re inviting them on private jets,” said Bennett Siegel, a co-founder of investment firm A* and an early investor in Decagon. “What you tend to see is the best companies are getting preempted every round and the time between rounds is shrinking.” I mean, it’s not entirely mediated by price. Price still matters; lobbing in an unsolicited offer at $5 billion probably works better than lobbing one in at $1.6 billion. Presumably venture capitalists preempt fundraising rounds by offering high prices, not low ones. But, still: origami cranes. Ferrari racing. The point is that the essential skill of a venture capitalist is not picking the right deals; it is getting access to the right deals. In the public markets, access comes from paying the highest price. In private markets, though, it is more multidimensional, involving price but also flattery and reputation and good tweets and origami cranes. A hot AI startup is in part a series of future cash flows, but it is also very much the personal project of a handful of founders, and the founders want more out of life than money. They want validation from top venture capitalists, they want to feel wanted, and for some reason they want autographed MMA posters. The public markets are mostly mediated by price, but not always. We talked last week about a merger battle at DallasNews Corp., the public newspaper company that owns The Dallas Morning News. DallasNews agreed to sell itself to Hearst Newspapers for $16.50 per share, but Alden Global came in with an offer of $20 per share. DallasNews has a controlling shareholder, though, and he’s a longtime newspaper guy who preferred Hearst for journalistic and community reasons. So DallasNews’s board rejected Alden’s higher offer — which could never close over the controlling shareholder’s opposition — and stuck with Hearst’s lower offer. That was not without risk: The merger required approval of two-thirds of each class of DallasNews stock, and you could imagine the public shareholders rejecting the Hearst deal in the hopes that, if it failed, they’d get the Alden deal instead. But, no, it’s fine. Today DallasNews announced that shareholders overwhelmingly approved the Hearst deal; the stock is now trading at pretty much $16.50. Incidentally! One reader emailed me to ask: What’s to stop Hearst from buying DallasNews at $16.50 and then turning around and selling to Alden at $20? Alden values DallasNews more than Hearst does, but Hearst is getting the company at a discount because it seems to have a better reputation for supporting journalism than Alden does. Could Hearst monetize that reputation by buying at $16.50 and selling the next day at $20? I mean. Once? [1] If Hearst did that trade, the next newspaper-guy controlling shareholder is not going to sell it any more newspapers at a discount. I guess the two essential functions of artificial intelligence in finance are: - Ingesting vastly more data than any human could, finding connections in that data, and using those connections to make detailed predictions of future asset prices that are right on average and impossible for humans to find; and
- Formatting pitchbooks.
That is, AI could be a good senior-level investment analyst, who can spot profitable trades better than any human, and/or it could be a good junior-level investment banking analyst, who can spot misaligned dollar signs and blurry logos better than any human. Here’s a Bloomberg News story about the weather: A tech firm is expanding the possibility of electric-grid forecasting by offering hourly projections of US power demand seven months into the future. That will provide energy traders a new view compared to 15-day weather projections and broad seasonal outlooks. To do so, Amperon Holdings Inc. is leveraging artificial intelligence and machine learning to create a range of hourly demand for this extended period that’ll be updated upon the daily release of global weather models created by Europe's biggest forecasting center, said Sean Kelly, a former power trader who co-founded Amperon in 2018. The firm’s customers will start receiving these forecasts on Wednesday in addition to the typical 15-day outlook Amperon offers. … The weather outlook is based on predictions from existing models developed by the European Centre for Medium-Range Weather Forecasting, or ECMWF. The group’s models provide forecast conditions every six hours, out to seven months. … Using machine learning, data scientists at Amperon have been able to boost the granularity of the ECMWF models and provide hourly temperature forecasts over a seven-month period, an approach that the company says its customers have asked for. … Hedge funds and other speculative traders are looking for such insights so they can place bets on the power market even at a split-second faster than other traders, said [Amperon founder Sean] Kelly. I feel like if you told me what the weather would be every six hours seven months from now, I could give you a reasonably good guess about the temperature each hour? But the AI’s guess is better. Elsewhere here’s a Wall Street Journal story about agentic AI: Starting this month, [Citigroup Inc.] will begin piloting new “agentic” capabilities inside of the proprietary AI platform it has been developing over the last two years. With the new update, users will be able to direct an AI tool to complete multiple tasks, accessing multiple company systems with a single prompt, Citi Chief Technology Officer David Griffiths said. … With the new capabilities, a user can direct a tool inside the platform, known as Citi Stylus Workspaces, to research a specific client, build a profile of them from both publicly available data but also multiple internal data sets, and translate it into a foreign language, all in a single step. That’s the sort of thing you’d ask an investment banking analyst to do, except for the translating part, which is a nice value-add. But now you don’t need the analyst. Possibly the lesson to draw from this is “be a senior investment banker, because an AI will have a hard time replicating the firm handshakes and human connections that lead to merger assignments,” but that is not a particularly confident prediction. The way a bank works is that you deposit dollars with the bank, and the bank lends them to someone and earns interest, and the bank pays you some of the interest and keeps the rest for itself. Right now the best rate you can get on a high-yield savings account seems to be about 4.35%. There is something metaphysically imprecise about saying “you deposit dollars with the bank” (the dollars are the bank deposit, loans create deposits, etc.), but it’s a useful intuition. In particular, if you have some dollar bills in your wallet, you can take them out of your wallet and deposit them in the bank and get your 4.35%. [2] The dollar bills weren’t being loaned out to anyone, but if you put them in the bank they will be. The way a stablecoin works, historically, is that you deposit dollars with a stablecoin issuer, and the stablecoin issuer lends them to someone and earns interest, and the stablecoin issuer keeps the interest for itself. Great trade, for the stablecoin issuer. The way a stablecoin works, in practice, in the US in 2025, is often that you deposit dollars with a crypto exchange, which deposits them with a stablecoin issuer, and the stablecoin issuer lends them to someone (the US government) and earns interest, and the stablecoin issuer pays some of the interest to the crypto exchange and keeps the rest for itself, and the crypto exchange pays you some of the interest and keeps the rest for itself. It’s not exactly like a bank account, but it’s not exactly not either. Right now Coinbase, the big US crypto exchange, offers this trade at 4.1% interest. Fine. Meanwhile, though, you have the stablecoins. What are the stablecoins? Their status is also metaphysically imprecise, but one way to think of them is something like “they are dollar bills, but on the blockchain.” The big innovation of crypto, the thing that distinguishes Bitcoin from dollars is, fundamentally, that dollars exist only as debt obligations of someone, while Bitcoins exist as their own atomic thing. [3] Dollars are transferred by asking your bank to transform liabilities it owes you into liabilities it owes someone else; Bitcoins can be transferred electronically without an intermediary because they are not anyone’s liabilities. Same with most other cryptocurrencies. And then stablecoins are cryptocurrencies worth a dollar. They are someone else’s liabilities — they’re the stablecoin issuer’s liabilities — but they sort of don’t work like that. For crypto purposes, they are electronic cash; they can be held on the blockchain and transferred without an intermediary. I can give you my dollar stablecoin without involving anyone else, though if you want to cash it out for an actual dollar you might have to involve the stablecoin issuer. But what is an actual dollar anyway? As I have often written around here, this neat innovation of crypto — a financial system without fractional reserve banking, where money could be held directly and electronically and without being anyone’s liability — was quickly overrun by, you know, fractional reserve banking. It’s fun and lucrative to create a leveraged financial system. If you have Bitcoins, and you’re not doing anything with them, you might as well lend them out to someone who wants them. What do they want them for? Oh, mainly speculation (short Bitcoin trades, etc.), but if they make money on that they can pay you some interest. And then same with stablecoins. If you have stablecoins, and you’re not doing anything with them, you might as well lend them out to someone who wants them. What do they want them for? Oh, mainly speculation (leveraged long Bitcoin trades, etc.), but if they make money on that they can pay you some interest. The point to notice here is that, if you have stablecoins, you can lend them twice. You put dollars into the stablecoin and get back stablecoins (with interest). And then you have stablecoins, which you can lend to someone (and earn interest). Your dollars get loaned out in the real world (to the US government, in the form of Treasury bills held by the stablecoin issuer) and also in the crypto world (to crypto speculators, in the form of a crypto lending program). So you should get, you know, at least twice as much interest as on a regular bank account? Anyway! Crypto exchange Coinbase has begun rolling out a new feature that lets users lend their stablecoin holdings onchain, with yields currently up to 10.8%. The service is powered by Morpho, a decentralized lending protocol, with allocations managed through onchain vaults curated by Steakhouse Financial on Base, the Coinbase-incubated Ethereum Layer 2 network. When users deposit USDC, Coinbase creates a smart contract wallet that routes funds across different lending pools to optimize returns. Users start earning yield immediately and can withdraw at any time, subject to liquidity, Coinbase said. Coinbase stressed that while the feature relies on DeFi protocols, it is designed to feel familiar and accessible to mainstream users through the Coinbase app. Coinbase already offers "USDC Rewards," paying 4.1% annual percentage yield or APY (4.5% for Coinbase One members). By lending USDC onchain, users can earn significantly higher yields, the exchange said. "USDC Rewards does not involve lending customer assets — it’s a customer loyalty program offered at Coinbase’s discretion, and with payouts coming directly from Coinbase’s marketing budget," a Coinbase spokesperson told The Block. “Customer loyalty program” and “marketing budget” is a complicated way to say “the issuer of USDC gets interest from its Treasury bills and passes some of that to you via us.” “Lend their stablecoin holdings onchain” is the other thing. Crypto has created double fractional reserve banking. It’s neat! What’s Mark Spitznagel up to? | Roughly speaking Mark Spitznagel, of black swan hedge fund Universa Investments, sells investors insurance against market crashes. If a journalist calls him up and says “will there be a market crash,” he sort of has to say yes? Like: - It’s true! In the long run, the market goes up sometimes and down other times. Eventually there will be a crash, so he will turn out to be right.
- It’s his business! If he was like “nope everything is fixed, so now the market will go smoothly up forever,” who would buy his crash insurance?
Spitznagel has various interesting things to say, but at some level his news function is that if you call him to ask “will there be a market crash” he will always enthusiastically say yes. Spencer Jakab has a fun column at the Wall Street Journal in which he called up Spitznagel, who was like “I’m super bullish! This is the Roaring ’20s! Buy all the stocks! But yes of course there will be a crash”: The alarming part of Spitznagel’s current outlook is that he sees conditions akin to 1929, the year of the Wall Street crash. The silver lining for those hoping the bull-market music will keep playing a while longer: He thinks this is more like the early part of 1929 when stocks added significantly to their Roaring ’20s gains.
Never hurts to have insurance though. How Nvidia Is Backstopping America’s AI Boom. SEC Chief Eyes Rule Exemptions for Crypto Trading by December. Morgan Stanley Taps Partner to Offer Crypto to E*Trade Clients. Wall Street Beats Private Credit on $20 Billion of M&A Debt. UBS whittles €4.5bn French tax evasion penalty down to €835mn. Jeff Bezos’ Billionaire Dad Is Hiring a CEO to Run His Family Office. Regional US casinos cash in as gamblers shun pricey Vegas trips. Retail sushi. “The kids I spend a little time with speak with disdain of B2B software and with respect for hard problems.” If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
