Providence Equity Partners’ Jonathan Nelson went on TV this week to publicly acknowledge the industry’s troubles in an appearance on The Charlie Rose Show. Nelson, called “a stealth mogul,” by Rose, mostly talked his book, but also discussed private equity’s furtive image: “Honestly, it sounds terrible. In an age of transparency, anything that’s private doesn’t sound very good.”
Given that Nelson had never been on TV before, he came on with an ambitious agenda: Renaming the entire industry. He noted that private equity was not actually private, given how many firms are now public. He suggested a name change like the one “private equity” instituted after the criticism of its rambunctious predecessor, “leveraged buyouts.”
It’s hard to argue with Nelson’s reasoning. Whenever the industry hits a crisis, it changes its name – an option not open to banks, unfortunately – so why not try again?
Nelson’s ideas for private equity’s rechristening? “Partner capital, growth capital, long-term growth capital…” You can contribute your ideas of all those in the comments.
But let’s get down to brass tacks. Rose noted that the industry still carries, to some, its old image of the careless corporate raider: “In some cases people with capital come in, buy a company, strip it down, then sell it and walk away with a profit or walk away where people are hurt and lose their jobs.”
Nelson said that 80% of the companies owned by PE are improved by the experience. (We’d like to see the numbers on that.) “It’s much more often the case where these companies flourished under private equity firms.”
But Nelson’s pitch hit a snag when it came to regulatory reform. Here’s what he said:
“We actually should be irrelevant in the conversation because regulation today should be about what triggered the crisis two years ago and soliving for that. It’s an interesting conversation. I’m not sure that’s exactly what we’re doing today with reform. But it would be reducing the probability and cost of systemic financial risk. We had nothing to do with that. Which, by the way, came as a surprise to us as practitioners, maybe because we thought we were much more important than we we were. We’re a very small part of capital markets, and behaved well during the crisis.”
The emphasis there is ours. Nelson hit on an important point, even if he didn’t intend to: It’s not time for the industry to crow about a crisis victory yet. Private equity didn’t cause the crisis, but many smart people thought it would – including its own practitioners and former Treasury Secretary Henry Paulson.
And that’s why private equity has a bigger problem than its name. We already know that private equity has a debt issue, with that $1.4 trillion wall set to mature in a couple of years. It’s not just that the PE industry used a lot of debt; it’s that it used a lot of bad debt. Remember PIK toggles and covenant-lite loans that allowed companies to keep going for years without technically defaulting on their debt, even though their operations were weak? Those were driven by PE deals.
The fact that the industry dodged a bullet shouldn’t leave investors complacent. The industry’s biggest challenge – during the crisis and until now – is using debt responsibly. Nelson was smart to finally try to give private equity a face and a voice among smart people. Now the challenge is for the industry not just to create a better image, but to live up to it.
Check out the interview, via Hulu (which is partially owned by Providence):