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Nassim Taleb, What Are You Talking About?

“Black Swan” author Nassim Nicholas Taleb today told Bloomberg TV that leveraged buyouts are “too close to Madoff” because “you rely on new investors to pay off other ones.”

What? Who ever told him that’s how buyout firms pay their returns? Any point about the riskiness of LBOs Taleb was trying to make has officially lost any credibility, as he is so misinformed. I’m confused as to why that even made a headline at Bloomberg.

We’ve posted the entire clip below, in which Taleb hints that we should ban or restrict leverage and covert debt to equity.

This “Ponzi” comment is just further evidence of a scary truth about private equity: no one outside of private equity understands it. That’s why it gets lumped in with hedge funds in regulatory issues, and now that’s why a well-known pundit says LBOs are “too close to Madoff.”

Just an FYI for Taleb: There’s a reason LBO firms aren’t blowing up like hedge funds. Limited partners in private equity and venture funds, unlike in hedge funds, can’t ask for redemptions. The committed capital, which is called down whenever the firm makes an investment, is invested in the equity of a company. You can’t fabricate a take-private.

Then, when that company is sold, the profits from the sale are returned to investors in distributions. It’s that easy. If a private equity firm goes down, it’ll be more of a slow, ten-year crippling. Just look at some of the dot com-era venture funds hanging around today, breathing their final, money-losing gasps.

I’m happy to criticize private equity when its players make costly mistakes. But at least get the facts straight before tossing around words like “Ponzi.”