In a one-two knockout, The Wall Street Journal and Bloomberg today published strongly worded anti-private equity columns: The former focusing on transparency, with an overarching theme of evil; and the latter focusing on debt, concluding quite brilliantly that debt is bad and private equity is risky.
I’m not a private equity apologist, but both of these pieces seemed weak. There was no new angle or reporting. Each one simply rehashed well-known facts, without addressing arguments from the other side.
The Wall Street Journal column, penned by AFL-CIO President Richard Trumka, revisits the New York Times’ extensive coverage of THL Partners’ big Simmons screw-up. I agree that that situation, and many others like it, is unfortunate. But I don’t agree that alternative assets “operate as a shadow financial system” because they aren’t required to disclose as much financial information as are publicly-traded companies or funds. Does that mean any large, privately-held business also is part of the seedy underbelly that is the shadow financial system?
Trumka goes on to reference that infuriating 2008 BCG report, which claims half of all PE-backed companies are likely to default. I believe has been discredited enough places that I don’t need to spend time on it here (I think even later BCG reports have caved on that assertion). Trumka states that without comprehensive regulation, private equity, hedge funds and even venture capital (the inclusion of which is laughable), will create a “buildup of systemic risk like that which brought our economy to the brink of financial ruin.”
Trumka also claims that half of the 163 non-financial companies that went bankrupt last year were backed by private equity firms. No idea where that figure came from but I believe more than 163 companies went bankrupt last year (around 89,000 or so more).
I also want to highlight the fact that not all buyouts are mega-buyouts, even though Trumka seems to think so. I believe middle market PE shops are especially capable of driving growth and, yes, “adding value,” often with less risk.
Despite all that, Trumka’s column is the better of the two in that it at least has a specific desired outcome of increased transparency by private equity firms. I don’t think that’s unreasonable. (As a reporter I’m slightly biased, of course.) But transparency is not going to stop buyout firms from making mistakes, and unfortunately that includes the big, ugly ones.
In the other corner, we have Bloomberg columnist David Pauly. He exposes private equity’s greatest secret: DEBT.
He’s right to say that private equity is all about debt, but it’s no secret. He’s also right to point out that the term “private equity” is a PR name created by leveraged buyout (LBO) shops after the junk bond boom and crash of the late ‘80s. (Fun fact: Our own Buyouts magazine is one of the only industry media stalwarts that I know of that still refuses to use the term “private equity” to describe LBO firms.)
He spells out that Blackstone’s stock has taken a beating since its IPO and that Hilton, TXU, and Harrah’s had to refinance a shitload of debt. And yes, fundraising dropped last year. But that is the entire meat of the story. Ultimately, it doesn’t matter if the portfolio companies had to refinance their debt because they were able to do it. And beyond that, those same loose lending terms and conditions from the boom-era are creeping back into vogue already. That is a whole other story, but it appears, for now, that the buyout barons are going to come out on top. Pauly admits this, resigning that LBO firms “no doubt will regain their popularity one day.” Private equity may never be popular in the media, but in the world of debt, I think Pauly’s prediction has already come true.
By the way, if LBOs and the debt they employ is so bad, then why aren’t the critics focusing on the lenders who are willing to commit to such flimsy terms and such high leverage? You can tell kids, “Don’t use drugs,” but they’re not going to comply if someone is dangling the drugs in their faces. I’m not implying that the buyout barons are innocent children incapable of making the right decision. But they are capitalists.