02 December 2022 Global | Other

Grey Swan #3: Private Markets Finally ‘Fall Over’

Is geopoetry a thing?

Before answering that, I would like to thank Professor Mustafa Erdik for an insight based on a three-word observation. He works in the Department of Earthquake Engineering at Bogazici University in Istanbul.

One of the fundamental aspects of earthquakes is that we know the regions in which they will occur, but we never know how powerful they will be or when they will strike. We kind of know, but we kind of don’t.

One of the world’s most active earthquake zones is the Anatolian Fault Zone that runs roughly East-West through Turkey. They have been waiting for the Big One in Istanbul for a while.

And it is coming.

All the experts like Erdik are more concerned at the increasingly dense population within the zone and that building standards are sometimes ignored or largely unobserved. (P.S., it is an interesting cultural phenomenon that families in this part of Turkey often add a storey to their houses as members get married.)

As resident expert on construction practices, Erdik was asked what he thought about the phenomenon of increasingly densely populated areas distributed throughout the Anatolian Fault Zone. Rather pithily, he used these three words to describe the inherent danger: the buildings were ‘rubble in waiting’.

As any experienced observer and builder of investment frameworks can recognise, in the economic and policy fault zone where we currently reside, we have constructed densely occupied edifices of risk.

Are they due for the Big One? We kind of know, but we kind of don’t.

Is it worth spending countless hours trying to identify triggers, timeframes, and processes that will warn investors when it is time to move somewhere less deadly? As with many major earthquakes, there are warning tremors. Not all the buildings will fall, but the poorly constructed ones will certainly become rubble.

Where are the ‘building regulations’ not observed? Where is ‘construction’ densest? Where has the building work been based most heavily on similar ‘blueprints’?

I think we all know where. It is ‘common knowledge’, something we all know that we all know. The ‘private’ markets: those non-identical twins, private equity and private credit.

This year, we have observed tremors in the public markets. But their design is more resilient following the Global Financial Crisis. And although they have swayed violently, there have been few, if any, rubbly events other than the ongoing collapse of that rotting shack of straw that is crypto. However, as with earthquakes, the most violent shakes are not necessarily the most destructive for all buildings. There are other events, other frequencies, other modes of energy transfer that are largely determined by the nature of the terrain in which they occur.

The most destructive of these is known as liquefaction.

Saturated liquidity (pun intended) in the terrain becomes detached from long deposited, unconsolidated sediments and turns solid ground immediately into a substance that behaves like a liquid. Providing zero support, irrespective of the type or quality of construction. The terrain is everything.

As we progress through 2022, the tremors continue, testing every building in different ways. Can private markets escape from sinking?

Now for the random poetry section, where a 19^th-century American poet provides us with the appropriate ‘model’ for the terrain of private markets. Cue Edna St Vincent Millay’s ‘Second Fig’, with only two lines:

Safe upon the solid rock the ugly houses stand

Come and see my shining palace built upon the sand!

So geopoetry does exist. But let us hope both Erdik and Millay were wrong; I fear they will both be right.