“Congress Does Not Understand Private Equity” And How To Change That

It’s unsettling to witness attacks on the image of a “Wall Street corporate fat cat” echo around the country. According to Bob McCooey of NASDAQ, The finger pointing is “a political maneuver done for show.”

And even worse, after a recent meeting with members of Congress, he said, “It’s amazing that so many members of Congress do not know what they’re talking about (in regards to private equity).”

And it’s true that the private equity business has gained an unfair reputation as mooching from tax loopholes. One way to combat that is through greater transparency. It could show that PE firms have historically been some of the best owners of companies, said Bela Sigethy of Riverside Company. “We need to show the good side of private equity,” he said.

“The very name private equity says it all,” added Dan Reid of Grant Thornton.

As a reporter I am all for more transparency-it’d make my job a lot easier. But I’m not sure transparency alone will magically reveal PE players as good Samaritans when they still have big birthday parties and 21 houses to criticize. Either of these things would be just fine if PE could, once and for all, definitively demonstrate itself as job creators. Proof of a PE-backed net job gain, excluding add-on acquisitions, is key.

The other thing I think PE has going for it is the industry’s transformation into what looks like investment banks. Look at Blackstone-the firm doesn’t just buy, lever, strip, and sell companies. Beyond buyouts, it’s got real estate funds, hedge funds, funds of hedge funds, debt funds, proprietary hedge funds, CLOs, and closed-end mutual funds, not to mention fund placement, restructuring, and M&A advisory services. So now if you attack its PE arm, that’s all it is, a mere arm of a sprawling, octopus-like financial institution. It’s admittedly the largest and oldest arm, but that could change as PE firms move away from those big bad overlevered mega-buyouts they can’t do any more.

But investment professionals don’t like that idea, according to an ACG Thomson Reuters Survey. In fact, 40% of them said that a diversified set of investment funds “is not what private equity investing is about.” But it could be in the cards like it or not: 30% said “it’s just a matter of time until the middle market follows suit” and diversifies.