be centred around, booming private markets. Investors that are under the impression that they had found the latest formula for success, have ploughed about $9.8tn into unlisted equity, private credit and early stage or new venture funding. Not to forget other existing factors that contribute to long term problems such as overvaluation, optimistic assumptions, aggressive accounting and high debt levels, there are additional concerns. Private investments are inherently illiquid therefore investors cannot minimize risk and losses easily. Monetisation is becoming harder at previously anticipated prices as they are highly reliant on initial public offerings and trade sales. Investments made through funds may mismatches between the redemption rights granted to ultimate investors and the ability to realise underlying assets. Investors can often be exposed to distressed forced distressed sales or trapped by restrictions on withdrawals resulting in opportunity costs. Lack of market prices are the cause of opaque valuations that misstates investment or fund values. Unlisted equity valuation models rely on comparable traded companies and private financing rounds. The discrepancies between these values and market prices can be large. After being valued in 2021 at $46bn, a 2022 $800mn funding round valued Klarna at $6.7bn (an 85 per cent fall). As the disappointing initial public offerings of Uber and WeWork highlight, the case is not isolated.
Private investments with sizeable borrowings face refinancing risks and are vulnerable to market disruptions, especially if prolonged therefore exhibit complicated layers of risk. After 2008, when securitised debt and off-balance sheet structures aggravated shocks, the so-called shadow system of banking outside traditional lenders regrouped. Currently investments are frequently held through tiers of funds, some with borrowings from banks or private providers. Securitisation of private equity loans and non-bank credit display familiar opacity and exacerbate leverage in the system. Falls in asset value anywhere can create instability elsewhere within the financial system. The recent history of highly managed money supply, low interest rates and artificially suppressed volatility encouraged investors to take on often unquantifiable and poorly understood hazards. The urgency to invest in private assets was predicated on the continuous availability of cheap capital as a sustainable investment strategy ignoring the indisputable positive correlation between risk and return.
