This is a piece I wrote on “private equity” in 2014. Hearing Trump’s choice for Commerce Secretary, Wilbur Ross, described on NPR as a leader of the private equity industry, prompted me to repost it.
The implosion of the junk bond market in the early 1990s, along with a number of high profile LBO failures – Federated Department Stores, Macys, Revco, and of course, the deal dubbed “the Burning Bed,” Ohio Mattress – made the term “leveraged buyout” somewhat unsavory. Then, in one of the most successful rebrandings in financial history, dealmakers thought up a new moniker and since then have operated under the accurate if unwieldy name “private equity.”
But the blush was soon off the rose. Buyout shops hit an even worse rough patch during the financial crisis, when some of the biggest LBOs of all time – Tribune, Harrah’s Entertainment, Station Casinos, Realogy – went toes up and the high yield market cratered again.
European politicians came to refer to buyout shops as “locusts,” and private equity in the US unfortunately became associated in the public mind with the hapless Blackstone boss, Steve Schwarzman, who compared a proposal to change the tax treatment of funds like his to the Nazi invasion of Poland. By 2008, private equity was once again a pejorative term .
Today, it’s almost a smear. Regulators are publicly calling the industry to the carpet for dodgy and fraudulent practices. News outlets smell blood. On May 21, the Wall Street Journal reported that the iconic LBO shop KKR appeared to be holding on to millions of dollars that should have gone to investors in one of its funds. This comes a couple months after an SEC official, Drew Bowden, released the scathing results of the agency’s investigation into private equity practices (hat tip Naked Capitalism).
Bowden said, “Some of the most common deficiencies we see in private equity in the area of fees and expenses occur in firm’s use of consultants, also known as ‘Operating Partners,’ whom advisers promote as providing their portfolio companies with consulting services or other assistance that the portfolio companies could not independently afford.”
Yves Smith of Naked Capitalism goes on to write, “If anything, Bowden’s boss Mary Jo White had been more pointed in the section of her Congressional testimony at the end of April.”
White said, “Some of the common deficiencies from the examinations of these advisers that the staff has identified included: misallocating fees and expenses; charging improper fees to portfolio companies or the funds they manage; disclosing fee monitoring inadequately; and using bogus service providers to charge false fees in order to kick back part of the fee to the adviser.”
Ouch. Somewhere a bunch of guys in blue shirts with white collars and red ties must be putting their heads together to devise a new name for their business. They might consider “public disgrace” or even “private machinations.” In any case, to paraphrase an old saw, the third name’s a charm.