A $369 billion investor lays out how the private-equity boom is supercharging a major risk in the stock market

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A $369 billion investor lays out how the private-equity boom is supercharging a major risk in the stock market

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  • Stock-market liquidity has been a challenge during recent periods of volatility.
  • At the next downturn, pension funds and endowments that are heavily invested in private equity would be hurt by the "blow up" in public markets, said Mark Machin, CEO of the Canada Pension Plan Investment Board, at the Milken Institute Global Conference.
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The private-equity industry is high on many lists of markets where a bubble is brewing.

Several experts have flagged the vast number of debt-fueled deals, and lofty financial projections for companies. According to Mark Machin, CEO of the Canada Pension Plan Investment Board, private-equity firms are sitting on about $1.7 trillion of uninvested capital - dry powder still waiting to be deployed.

But this massive war chest on its own is not the primary concern, said Machin, who oversees $368.5 billion in assets, during a panel discussion at the Milken Institute Global Conference on Monday.

Instead, Machin's warning was about how the private-equity boom is exacerbating a parallel risk that exists in public markets: low liquidity.

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His concern is that any downturn would see investors look to sell their remaining liquid assets, like stocks, and find that those markets aren't as easy to get out as they had assumed.

"Pension funds, sovereign funds, and endowments around the world need to be super careful to not lean in too much on the private side, and to not rely on the fact that the public stuff will be liquid," Machin said.

During a future episode of volatility, large investors will be trying to sell the same stocks. The fallout would be two-fold: investors find it difficult to exit large equity positions, and consequently, struggle to raise the cash that funds private companies.

Research by JPMorgan has shown that there's a direct relationship between the extent of stock-market moves and the ease of trading large positions: when volatility increases, liquidity shrinks.

"There's not much inventory in many of these asset classes, as we know," Machin said.

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"We saw the behavior - the gapping in December - in a number of these markets, and I think you're going to find that risk models could blow up very quickly on the public side and trigger more events. So I think people need to be super careful."

Despite these cautionary words about the next downturn, Machin said there were still investable, long-term opportunities in US, European, and Asian private equity.

"Back in the day, when a lot of small companies were going public very early, arguably a lot of those companies were too early for primetime," Machin said. He continued: "There's been more growth in private capital to nurture these companies for more years before they actually become public - not necessarily a bad thing."

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