The BCG Study: Agree or Disagree?

There have been numerous mentions of that ubiquitous BCE study from late December here at PEA. You may remember the study, it predicted a shake out of private equity firms to the tune of 20% to 40%. I expressed mild skepticism over the study in a post aptly titled, Merry Christmas, Your Firm May Fail.

But the question for panelists is, do you agree? Their answers may surprise you. John LeClaire of Goodwin Procter said “It is more provocative than necessary.” Judging by the feedback I received on the previously mentioned blog post, many a deal pro would agree.

Is it wishful thinking?

Stefan Selig of Bank of America said rather bearishly, “There will be a shakeout. People said, ‘Banks have long term capital’ the same way they now say ‘Private equity has long term capital.'” He predicted a barbel effect, with a smaller number of firms. The larger players and the niche players will survive, everything in between will be in trouble.

David Lobel of Sentinel Partners (who I mentioned earlier) agreed. He went so far to say, “The BCG study is more right than wrong.” He believes even top quartile firms are in a position where their portfolio companies are at their weakest, they have no access to capital, and will be unable to raise more if they would like to. A shakeout will certainly be slower than that of the fast-money hedge funds, but could happen on a comparable scale.

Lobel added that he thinks concerns over carried interest are no longer at the forefront for private equity. Now that the government has stakes in corporations, taxpayers care more about tangible things like the behaviour of the CEOs of those companies. Private jets, expensive curtains, etc. Compared to that, a discussion about carried interest seems arcane, he said.

Download the BCE Study here.

Notably, the consulting firm published a study titled, “Why Private Equity is Here to Stay” less than a year earlier.