Where Are the Defenders of Private Equity?
Felix Salmon searches for defenders of the private equity industry:
RGE - Where are the defenders of private equity?: Edward Chancellor on private equity... penned something over 2,750 words attacking the private equity industry and all it stands for. Here's the shorter version:
There's a very wide distribution of returns between the best and the worst managers. Unless investors have money in the best-performing buyout funds, they're likely to do far worse than average... Over the past 10 years, investors could have beaten the returns of the best private equity funds simply by applying private equity-style leverage to a portfolio of quoted mid-cap value stocks....
Many private equity deals nowadays involve buying companies from other buyout firms. These so-called "sponsor-to-sponsor deals" offer little obvious scope for operational improvement.... Private equity has come to resemble a game of hot potato in which companies are handed from one private equity firm to another, sometimes as often as three or four times in succession....
Private equity firms could clog up the world's stock markets as they prepare to float upwards of a trillion dollars worth of companies in the years to come. That may not be good news for limited partners, but the private equity firms will still harvest tens of millions of dollars in deal and management fees.... There's the legacy of excessive corporate debt to consider. This could cripple hundreds of companies in years to come...
Chancellor concludes:
In fact, the only major financial players who stand to profit from a buyout bust are the private equity firms themselves. Senior industry figures acknowledge that corporate valuations are currently unattractive. Some admit, in private, to looking forward to a downturn, which might allow them to acquire companies at more affordable prices. Several firms, including industry titans Blackstone, Carlyle, KKR and Texas Pacific have anticipated such an outcome by raising distressed debt funds. Today's private equity boom is shaping up to add yet another chapter to Wall Street's long history of cynicism and arrogance.
I can't say that I really disagree with much of what Chancellor says, although I certainly don't feel as vehement about it as he does. What I'd be really interested in reading, however, would be a cogently-argued defense of private equity, which is something I haven't seen much of, lately.
