Personally love GP co-investing but it reflects the increased commoditisation of investing and liquidation of illiquid markets. The risk-shifting between groups of investors breaks the linkage between the risk of the underlying asset and the responsibility from the original group of investors to prudently invest. To whit the best comparison is the securitisation of mortgages (risk shifting) creating an origination to distribute model that incentivised one group (originators) to make loans even though the mortgage market was functionally insane because their returns were predicted on the volume of loans not the quality of those loans.
The mortgage parallel is dead-on, the market for mortgage securities is nearly totally divorced from the housing market, even more so with the distorting effects of a government guarantee.
The mortgage market is just in an advanced state of extreme disintermediation between the original borrower and lender. This disintermediation is seen in other parts of the financial services industry where it pays to be hyper-specialised and to find an exploitable niche. In the race to find returns for investors, the GP secondaries market is heating up. Liquidity drives prices up and creates a break between the price of a security and the underlying value of the economic returns to that security. Economic gravity eventually wins out but prices can remain elevated longer than our capacity for surprise can persist.
Personally love GP co-investing but it reflects the increased commoditisation of investing and liquidation of illiquid markets. The risk-shifting between groups of investors breaks the linkage between the risk of the underlying asset and the responsibility from the original group of investors to prudently invest. To whit the best comparison is the securitisation of mortgages (risk shifting) creating an origination to distribute model that incentivised one group (originators) to make loans even though the mortgage market was functionally insane because their returns were predicted on the volume of loans not the quality of those loans.
The mortgage parallel is dead-on, the market for mortgage securities is nearly totally divorced from the housing market, even more so with the distorting effects of a government guarantee.
https://www.lewisenterprises.blog/p/the-invention
The mortgage market is just in an advanced state of extreme disintermediation between the original borrower and lender. This disintermediation is seen in other parts of the financial services industry where it pays to be hyper-specialised and to find an exploitable niche. In the race to find returns for investors, the GP secondaries market is heating up. Liquidity drives prices up and creates a break between the price of a security and the underlying value of the economic returns to that security. Economic gravity eventually wins out but prices can remain elevated longer than our capacity for surprise can persist.