Does Private Equity provide a social good?

In my circles, I find differing views about private equity. Some see it as the epitome of greed; others, as the vengeful sword of the angel of capitalism. Quite a few don’t quite “get” just what it is.

I’m temperamentally inclined to come down squarely in the middle, but I want to articulate a few positives in the bigger picture of things. Relating to trust, no less.

Private equity is now bigger than the 80s version of corporate restructuring (remember Millken and Drexel, Burham?). And, it’s still gathering steam.

Back in February, BusinessWeek was commenting on a PE slowdown. Last week, however, we read, "So far this year, the value of companies acquired through buyouts has more than doubled to $487.2 billion."

One intelligent observer, blogger Epicurean Dealmaker, raises some ominous noises.

He may be right about timing, but I also think private equity is here to stay, in a big way, and that’s not all a bad thing by any means.

First, think about what ails corporate America. Lots of things, but a few of them are sloth, bureaucracy, inertia, underpriced assets, and greedy managers who serve their own interests at the expense of shareholders. For these particular ills, private equity is a powerful solution, and one that serves society.

PE at its best, that is. It’s also true that a whole lot of PE is just re-leveraging companies and sucking fees out of them, without doing fundamental fixes. And debt levels are way up for today’s deals. Still, that’s hard to get too worked up about; if there are crashes in the PE world, the pain will be disportionately visited on gunslingers in zipcodes like 06830.

Second, private equity also forces the issue of regulation. Some argue that Sarbanes Oxley is prohibitively expensive for public companies, hence companies are far more efficient if taken private. That smacks of ex post facto rationalization, but never mind; the issue is valid enough. Unlike some societies, we have an escape valve for bad government regulation.

A more fascinating peek at the social engineering issues it raises is the recent post from the delightfully vicious Equity Private . Nobody can bemoan like her the encroachment of HR and PR into the heretofore merciless realm of the private equity long knives. She could make you feel bad for Atilla the Hun.

She’s got a point—PE is big enough business now that its Gekkos are worried about softening up their image. So the pressure isn’t just to ease up SarbOx on the public side, it’s to ease off the Darth Vader thing on the PE side. Classic socio-political compromise, writ large.

But there’s one more way in which PE is a net plus. The world economy is doing two things: getting more linked, and getting more outsourced. That means more links between companies, rather than within them. It gets easier to have the world expert in XYZ do that for you, while you focus on being the world’s best at ABC. Transaction costs will be externalized, to get all economist on you. The world will get better at horizontal, linking relationships, replacing vertical lines of command and control.

That means the world is moving toward breaking companies up, not putting them together. Which means trust will be a key business success factor. Another long-term reason why PE plays a net plus role.

And as long as I’ve got my financial hat on, I might as well point out that on May 21 I suggested it was a good time to go short a few stocks. Not that you should trust me on investments; even a broken clock tells time right twice a day. I’m just sayin’.

0 replies
  1. Ian Welsh
    Ian Welsh says:

    Is the world moving towards breaking companies up?  I could be wrong, but it seems like while in theory perhaps they should be, in fact what we’re seeing is more and more aglomeration of companies.

    Reply
  2. The Epicurean Dealmaker
    The Epicurean Dealmaker says:

    Thanks for the boost, Charlie. As always, you are a voice of reason.

    Although I must say that I am disappointed that you chose to anoint that saucy minx Equity Private with the moniker “delightfully vicious.” I wanted that title.

    Oh well, I guess I’ll just have to settle for “intelligent.” * Sigh *

    TED

    Reply
  3. Sean-Paul Kelley
    Sean-Paul Kelley says:

    My question, or problem with private equity (I was an asset manager for ten years) is what happens <a href="http://blogs.wsj.com/marketbeat/2007/06/11/the-new-conundrum/">when the easy money dries up?</a> What happens when the Fed finally turns off the golden spigot? Won’t then the folks at Blackstone and Cerberus be nothing but empty shells, holding companies for giant corporations they don’t know how to manage which they planed on stripping apart and are left without any capital to finance their buying binges any longer? Not to mention <a href=http://www.ft.com/cms/s/7149ca3a-181d-11dc-b736-000b5df10621.html>this kind of insanity.</a> Gordon Gekko lives.

    It’s just like the great convergence of conglomerates in the late 60s, early 70s. Remember when ITT was going to take over the world? And then the corporate raiders busted them all up in the 80s. Same cyclical pressures here, except this time they’ve shipped all the productive assets offshore and we’re left with a hollowed out, financialized economy that produces nothing of value.

    Reply

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