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The recent growth of private markets has been a phenomenon. Indeed, private funds, which include venture capital, private equity, private debt, infrastructure, commodities and real estate, now dominate financial activity. According to consultants McKinsey, private markets’ assets under management reached $13.1tn in mid-2023 and have grown at close to 20 per cent a year since 2018.

For many years private markets have raised more in equity than public markets, where shrinkage as a result of share buybacks and takeover activity has not been made good by a dwindling volume of new issues. The vibrancy of private markets means that companies can stay private indefinitely, with no worries about gaining access to capital.

One outcome is a significant increase in the proportion of the equity market and the economy that is non-transparent to investors, policymakers and the public. Note that disclosure requirements are largely a matter of contract rather than regulation.

Much of this growth has taken place against the background of ultra-low interest rates since the 2007-08 financial crisis. McKinsey points out that roughly two-thirds of the total return for buyout deals entered in 2010 or later and exited in 2021 or before can be attributed to broader moves in market valuation multiples and leverage, rather than improved operating efficiency.

Today these windfall gains are no longer available. Borrowing costs have risen thanks to tighter monetary policy, and private equity managers have been having difficulty selling portfolio companies in a less buoyant market environment. Yet institutional investors have an ever-growing appetite for illiquid alternative investments. And big asset managers are seeking to attract rich retail investors into the area.

With public equity close to all-time highs, private equity is seen as offering better exposure to innovation within an ownership structure that ensures greater oversight and accountability than in the quoted sector. Meanwhile, half of funds surveyed by the Official Monetary and Financial Institutions Forum, a UK think-tank, said they expected to increase their exposure to private credit over the next 12 months — up from about a quarter last year.

At the same time politicians, most notably in the UK, are adding impetus to this headlong rush, with a view to encouraging pension funds to invest in riskier assets, including infrastructure. Across Europe, regulators are relaxing liquidity rules and price caps in defined contribution pension plans.

Whether investors will reap a substantial illiquidity premium in these heady markets is moot. A joint report by asset manager Amundi and Create Research highlights the high fees and charges in private markets. It also outlines the opacity of the investment process and performance evaluation, high friction costs caused by premature exit from portfolio companies, high dispersion in ultimate investment returns and an all-time high level of dry powder — sums allocated but not invested, waiting for opportunities to arise. The report warns that the huge inflows into alternative assets could dilute returns.

There are wider economic questions about the burgeoning of private markets. As Allison Herren Lee, a former commissioner of the US Securities and Exchange Commission, has pointed out, private markets depend substantially on the ability to free ride on the transparency of information and prices in public markets. And as public markets continue to shrink, so does the value of that subsidy. The opacity of private markets could also lead to a misallocation of capital, according to Herren Lee.

Nor is the private equity model ideal for some types of infrastructure investment, as the experience of the British water industry demonstrates. Lenore Palladino and Harrison Karlewicz of the University of Massachusetts argue that asset managers are the worst kind of owners for an inherently long-term good or service. This is because they have no incentive to sacrifice in the short term for long-term innovations or even maintenance.

Much of the dynamic behind the shift to private markets is regulatory. Tougher capital adequacy requirements on banks after the financial crisis drove lending into more lightly regulated non-bank financial institutions. This was no bad thing in the sense that there were helpful new sources of credit for small- and medium-sized companies. But the related risks are harder to track.

According to Palladino and Karlewicz, private credit funds pose a unique set of potential systemic risks to the broader financial system because of their interrelationship with the regulated banking sector, the opacity of the terms of loans, the illiquid nature of the loans and potential maturity mismatches with the needs of limited partners (investors) to withdraw funds.

For its part, the IMF has argued that the rapid growth of private credit, coupled with increasing competition from banks on large deals and pressure to deploy capital, may lead to a deterioration in pricing and non-pricing terms, including lower underwriting standards and weakened covenants, raising the risk of credit losses in the future. No prizes for guessing where the next financial crisis will emerge from.

President Jimmy Carter waves to the crowd while walking with his wife, Rosalynn, and their daughter, Amy, along Pennsylvania Avenue from the Capitol to the White House following his inauguration in Washington, D.C., on Jan. 20, 1977. On the following day, he issued a pardon for people who had evaded the Vietnam War draft.

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Suzanne Vlamis/AP

President Jimmy Carter waves to the crowd while walking with his wife, Rosalynn, and their daughter, Amy, along Pennsylvania Avenue from the Capitol to the White House following his inauguration in Washington, D.C., on Jan. 20, 1977. On the following day, he issued a pardon for people who had evaded the Vietnam War draft.

Suzanne Vlamis/AP

When President Jimmy Carter was inaugurated in 1977, he wasted little time fulfilling one of his most controversial campaign promises: pardoning those who evaded the Vietnam War draft.

Carter issued Proclamation 4483 on his first full day in office, less than two years after the end of what was then America’s longest war.

The new commander in chief was hoping to heal the divisions left by the conflict, but the move also drew criticism from some who believed it was too lenient toward the men who had sidestepped military service during the war.

It’s one of the defining presidential moments for Carter, who died on Dec. 29 at age 100.

Anti-war activists had urged pardons for draft violators

Carter himself had served in the armed forces before entering political life. He graduated from the Naval Academy in 1946 and rose to the rank of lieutenant.

But during the Vietnam War — and especially as public sentiment turned against the conflict — young men made efforts to avoid the draft.

There were legal ways to avoid the draft, such as going to college or having a medical condition that exempted you from military service. And there were illegal ways, such as fleeing to another country.

Absconding abroad required money. The majority of enlisted men who served in Vietnam came from working-class backgrounds.

As America’s involvement in the war wound down, the public was faced with the issue of what to do about those men who had eluded military service and were now in legal limbo.

Curtis W. Tarr, then the director of the Selective Service System, turns one of the two Plexiglas drums during the fourth annual draft lottery on Feb. 2, 1972. Inside are capsules containing birth dates and orders of assignment for men born in 1953.

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David Kieran, a professor of military history at Columbus State University who has written about the Vietnam War, said Americans were divided on the question of whether to punish draft evaders for violating the law or forgive them to help the American public move on from the war.

“Were these people who had not lived up to their civic duty … and had failed to serve their country when their country called?” Kieran said. “On the other hand, there were people who argued these were people who had taken a moral stand against an unjust war.”

During the 1976 presidential campaign, Carter said it was critical for the country to unite after the war and vowed to pardon all the men who had evaded the draft.

“I think that now is the time to heal our country after the Vietnam War,” he said during a televised debate.

His Republican opponent, then-President Gerald Ford, didn’t support an across-the-board pardon. During his time in the White House, Ford started a program granting amnesty to some men who had evaded the draft during the Vietnam War in exchange for 24 months of public service.

Carter made good on his promise — and got flack from both sides

Carter won, and after he was inaugurated he issued a pardon for certain people who “violated the Military Selective Service Act by draft-evasion acts or omissions committed between August 4, 1964 and March 28, 1973.”

Protesters against the United States’ participation in the Vietnam War are seen outside the national headquarters of the Selective Service System, which oversees the draft, on May 3, 1971, in Washington, D.C.

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The pardon meant that the thousands of men who skirted military service and either went underground or fled abroad to countries such as Canada and Sweden wouldn’t face criminal charges. It didn’t apply to people who had begun military service and then deserted.

The move was pilloried by members of the military and conservative politicians, who said it was an insult to those who had gone to Vietnam. Sen. Barry Goldwater, a Republican from Arizona, said the pardon was “the most disgraceful thing that a president has ever done,” The Washington Post reported at the time.

Yet others said Carter’s action didn’t go far enough.

The American Veterans Committee praised the pardon but said it should have also included deserters and those who were given less-than-honorable discharges, categories that were disproportionately represented by “minority and less advantaged groups in our society.”

In the years that followed, Kieran said, conservatives continued to view liberals as apologizing for the Vietnam War, with Republican presidential candidate Ronald Reagan declaring in 1980 that America had fought for a “noble cause” in the country.

But decades later, Carter still defended the pardon as “the right thing to do” and saw it as an extension of the partial amnesty program undertaken by the Ford administration.

“I think, in that sense, [Carter] is seen as having made a good-faith effort,” Kieran said, “to address an issue that had been a fairly significant one in American life for nearly a decade by the time he becomes president, and really sought to find a way to help the country heal after Vietnam.”