Private markets “haven’t been tested” yet by a steep economic downturn, the chief of $2.1tn bond giant Pimco has warned, urging the need to “constantly think about what can go wrong”. “We really haven’t had a hard recession since the great financial crisis,” said Emmanuel “Manny” Roman, chief executive of California-based Pimco, in an interview with the Financial Times. “You saw one very dicey month during Covid,” he added, before a flood of public money came to the rescue. “The private markets in their current form haven’t been tested, and they will be tested when there’s a recession.”
Roman is well-positioned to assess the potential pitfalls of the roaring expansion in private capital, as asset managers and private capital firms rush to expand investor access to private markets, triggering concerns over whether such illiquid assets are suitable for retail investors. About $200bn of the firm’s assets under management were invested in alternative assets as of March 31, making it a major player in private capital. Last week, Bloomberg reported that social media giant Meta had picked Pimco to lead $26bn of debt financing to fund its data centre expansion.
Private equity, private credit, real estate and other “alternative” asset classes have boomed in recent years, as investors seek out higher returns than those available in public markets. A study from consultants at Bain and Company last year projected private market assets under management would grow at more than twice the rate of public assets to reach as much as $65tn by 2032. A widely anticipated White House executive order, issued this week, will open up 401(k) retirement accounts to private markets, a probable catalyst for even greater demand for so-called “alts”.
Roman specifically pointed to an “enormous” need for “infrastructure, energy transmission and data centres” in the UK and the US, both “rebuilding what’s not working, but also bringing us to the age of [artificial intelligence]. For that, you need huge capex in terms of data centres, but also you’re going to need to have much faster electricity and telco grids, and so all this will need financing one way or the other.”
Roman said “we constantly think about what can go wrong”, adding that a downturn could take the form of anything from a localised recession to a global economic shock. If a sharp downturn were to occur, many believe the Federal Reserve would move to cut US interest rates in response — potentially easing debt financing costs for corporate borrowers, in a scenario that could simultaneously take the pressure off their private equity owners. Still, some bankers and investors — including Pimco — have cautioned that stock market valuations could be entering “bubble” territory, reflecting too much complacency about the threat of further trade ructions and other political risks.
Roman said Pimco tried to find assets “where we understand pretty well the downside if we have an economic shock”. “We’re trying to understand where we think there are opportunities and excess returns. And I think we’re doing it in a way that if there is a recession, we will manage risk in an appropriate manner.”
Pointing to previous moments where markets have “stopped working”, including the 1980s savings and loans crisis, the dotcom boom and bust of the early 2000s and the financial crisis a few years later, Roman said: “We keep that in the back of our mind, and say ‘Look, you know, we’re fixed income managers; so, we tend to be cautious by nature.’ But at some point in time, something will happen that will test the downside.”