The greatest financial crisis currently in the making that few media outlets have reported on is private equity investment funds.

​Unlike the publicly offered, publicly traded portfolios that we manage, private equity is, like its name says, private, with limited oversight and transparency, maybe an audit which few investors read.  The managers of the investments are in charge and set their own valuations.  Managers pay themselves and to a great extent report whatever information they decide to.

Private equity, often structured as partnerships, has been all the rage over the past decade.  During the steep market declines last year, most private equity investments reported positive returns.

Why don’t investment managers want to show negative returns?  Simple, private equity managers are paid a percentage of their funds’ investment returns.  The higher the valuations they set, the more they get paid.

If investors exit private equity, they either sell their investments back to the fund, on a set schedule in defined amounts (for example, once a year and a maximum 5% of the fund) or they find another partner to sell to.

Over the past year, limited partnership transactions in the secondary market have been made at prices -15 to -20% below valuations set by even higher-quality partnerships’ investment managers, i.e., the general partners, many -30 to -40% below.

Private equity investment funds might sound like smart deals, but I’ve found few are.  In the past, good times have bailed out bad managers, allowing losses to be recouped.

As we’ve all heard, good times and dark secrets, they don’t last….

Banking crisis underway, but a different sort from past crises.   Most will do fine. Those who should be cautious have combined balances for a single bank above the FDIC-protected $250,000 per depositor.

So far, the FDIC has agreed to cover unlimited balances, even those above their maximum.  In the end, a failed bank gets sold to a healthy bank.  The FDIC absorbs banks’ losses.  This has put the deposit insurance fund at risk.  To cover its $23 billion in losses, the FDIC is raising the insurance premiums that banks pay.

Failed bankers had been reckless.  These weren’t community banks like in the film It’s a Wonderful Life, in which the bank finances our local businesses and neighbors’ homes.  These banks failed because they re-invested the cash from their huge corporate depositors into long-term, fixed income securities that dropped sharply in value due to rising interest rates.  When large depositors heard their bank was in trouble, they withdrew their money, forcing the banks to sell securities at massive losses.  One problem led to another, all of which could have been foreseen. 

Millions of individuals have since been rethinking their banking arrangements.  Money market funds at Fidelity Investments and others are higher-yielding alternatives, as is the safety of U.S. Treasury bills, and all the local community banks I’ve reviewed recently should ride through the tumult just fine even after recording losses.

As a result of the crisis, banks are restructuring their balance sheets to avoid becoming case studies for failure in the future. 

​Trust is earned and recklessness will eventually fail.  The same could be said of investing.