Should We Have Been Harder On Private Equity?

Jon Stewart’s chastising of CNBC has no doubt caused other financial journalists to reflect on their coverage of the past few years. Here at peHUB, that means the private equity bubble.

Business publications did their fair share of suggesting LBOs used too much leverage. But looking at the massive write-downs, the sharp rise in PE-backed bankruptcies, PE layoffs, the deeply discounted secondary market, and near-worthless portfolio company debt, it’s not out of the question to suggest we became numb to the numbers, and were too easy on private equity.

‘But private equity has always been a media scapegoat,’ you say! It’s true, issues like carried interest, cost cutting, and Warren Buffet disses have brought a lot of negative attention to the asset class. But from a pure investment standpoint, did we become complacent to the quick flips and over-leveraging in exchange for access? Are we so close to our sources that we don’t take the responsibility to step back and loudly, boldly question when they’re risking investors’ money?

I haven’t been closely covering the industry forever,* but from what I’ve read, I say yes and no. For every 10 sensational stories of PE-cheerleading, there is one well-articulated warning story. As to the cheerleading, there’s the famous 2006 BusinessWeek cover story, which declares, “Hotshot managers are fleeing public companies for the money, freedom, and glamor of private equity.” It spends pages describing the excitement and motivation for a large public company to go private:

Luminaries like (J. Crew CEO Mickey) Drexler are bolting in droves for private equity, the freewheeling world where investors buy slumping companies and try to turn them around to sell or take public, risking billions of dollars in the process.

The article basically dismisses the possibility of a fall-out, saying, “Sooner or later, the private-equity market will cool off. But for now it is sizzling.” That simple, eh, BusinessWeek?

On the other hand, there are stories like this 2005 piece by Andrew Ross Sorkin, where he correctly warns that the “great global buyout bubble” could pop in around three years:

In the next three years, to reap returns on all those big-name investments they have been making, private equity firms are going to have to sell $500 billion worth of assets. The question is, to whom? Even in the last three years, in as big a bull market as they come, private equity has never sold more than $153.2 billion in a year, according to Freeman & Company.

Scary stuff. Did either of these stories make much of a difference? It’s not as if the investors in mega-buyout funds could exit their commitments at the drop of a hat. Likewise, how much of a difference could they make, when PE pros, like bank CEOs, have a slick answer to a reporter or investor’s every question. Besides, unlike the CEOs of the banks, which are all publicly traded, PE pros don’t have to disclose anything to the general public.

Either way, it’s hard to say what difference CNBC could have made had their coverage of the mortgage crisis and banking collapse held executives accountable. Likewise, I can’t really hypothesize whether earlier, more often, and more urgent warnings on the buyout bubble would have made any difference. At this point, it’s OK to reflect, wonder why, and point fingers, but it’s better to seek a solution.

Stay tuned for more on this topic Monday….

Disclosure: I joined Thomson Reuters just after the credit crunch began, which, in retrospect, was pretty crappy timing.