From Black Hats to White Knights?

As the markets began to turn last year, I offered the following prediction: Public perceptions of private equity would only get worse, as economic pressured force firms to enact portfolio company layoffs and other cost-cutting measures. In other words, rampant accusations of “bad acts” would finally have a basis in modern reality.

Some of this has already happened, thanks largely to a recent spike in portfolio company shutdowns and bankruptcies. But there also has been a twist I did not anticipate, whereby some of the presumptive black hats are transforming into white knights.

The prime example of this phenomenon is TPG Capital’s offer to lead a $5 billion $7 billion investment into Seattle-based mortgage lender Washington Mutual (WaMu). Now we can certainly question the ROI value of PE firms making big bets in public equities – as Andrew Sorkin does in today’s NY Times – but the headline here is that a PE firm is voluntarily taking a possible bailout burden off of taxpayers. I know, I know – it isn’t taxpayers’ responsibility to help a struggling financial institution, but try telling that to the Fed.

There may be some public backlash to this deal by diluted WaMu shareholders, but that’s of minor concern from a PR perspective. And, as both Sorkin and I have repeated ad nauseam – public perception must matter to private equity. It can affect regulatory rulings, tax decisions and the ability of public pension funds to invest unfettered in the asset class. So if this deal goes through, the PE industry has to send a second Thank You note to David Bonderman.

The first was for holding his extravagant birthday party in Vegas, where no one notices extravagant birthday parties. The second is for helping the industry’s image rise up when it has every reason to be sinking.


  • My question is for all the other private equity firms that have done PIPE’s such as Warburg, Pincus and KKR, is why should an LP pay usurious fees (2/20 or higher, which generally works out to about 700 bps of AUM) for them to buy that stock on my behalf when I can do the same through Ameritrade for 6 cents a share (or 50 bps in the case of WAMU at $12 per share)?

    How does PE firms justify their high fees when purchasing these liquid, public securities?

  • [...] * The Economist suggests that private equity may be successful at helping to ease the credit crunch. I’m pretty sure someone else recently wrote that as well… Kind of reminds me of an old Homer Simpson line about alcohol, which I will now alter: “Private Equity: The cause of – and solution to – all of life’s problems.” [...]

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