Predatory Capitalism; Late Stage Prisoners Dilemma

As someone who previously worked in emerging markets trading, the ability of a few well-resourced players to set and drive a price is something I’ve very much been on the very wrong end of (read about me getting smacked by the Dong).

It’s the perfect embodiment of the HFC strategy. Take a company that was likely solid and in a hot sector. In Jan 2021, markets were already going crazy. You then team up with your friends and pour a bunch of money into it, and then just a few months later, you all pour even more money into it. Everyone happily pays an exorbitant price because it means everyone gets to mark up their books. Everyone could then go out and raise new funds by marketing those unrealized results. In a business where you get paid a percentage of assets under management, it’s a no-brainer. As of a few months ago, you might even be able to flip the company to the public markets at that high price.

Every cycle has its own poster-child and this model of gigantic public capital moving into private markets is unprecedented for this current vintage. The dynamics are so unique because the markets are opaque, the players set the price, there’s no ability to short, and everyone involved has an interest to not mark assets down.

Note 3: A big question I didn’t address here is what additional fallout there might be. There was a great piece called the Minsky Moment in venture capital, about how all the circular dynamics that drove capital into private markets could reverse:

readmargins Late Stage Prisoners Dilemma