The Oracle Attacks Private Equity, Again

It’s only been six months since Warren Buffet called private equity firms “porn shop operators,” but The Oracle of Omaha can’t stay away from one of his favorite punching bags for long.

In his annual letter to investors, Buffet called out private equity firms for being too opaque, and abusing portfolio companies behind those closed doors. He writes:

Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a
business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing.

He goes on to point out that “a number of” private equity portfolio companies are in “mortal danger.”

A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70¢ on the dollar, and the public debt has taken a far greater beating. The private-equity firms, it should be noted, are not rushing in to inject the equity their wards now desperately need. Instead, they’re keeping their remaining funds very private.

Just to play devil’s advocate, what does “keeping remaining funds very private” mean exactly? Is he saying the funds are keeping their money to themselves, and that their unwillingness to throw good money after bad is inherently a bad thing?

First of all, what’s wrong with a firm admitting it made a mistake and not allowing itself to lose more money on a doomed operation? If the bankrupt portfolio company is meant to survive, some distressed turnaround buyer can swoop in, buy it at a bargain and make a killing in the process. Until we see more buyouts in which the PE firms manage to take away a profit on a failed investment, I don’t think we can complain that they’re not propping up zombie portfolio companies.

And I doubt that the already stressed-out LP community would let the former scenario happen. Talk of clawbacks has been rumbling for at least a month now, and we’ve seen plenty of other cracks in the GP’s stronghold over LPA terms, such as fund size and fee reductions.

Second of all, what better example is there of private equity firms not keeping their remaining funds “very private” than their enthusiasm for the new bank bailout plan? Despite not having enough details to actually spring into action, many buyout pros at top shops have expressed interest in some form of the proposed plan to encourage their investment our country’s banking system. Last week Blackstone Group’s COO, Tony James, said his firm was in talks with the Fed and the Treasury about the terms and logistics of the plan during Blackstone Group’s earnings call.

Now, as I said, that is the devil’s advocate point of view, since there’s no way I can paint buyout pros as angels. Even Buffet’s criticism of name of the industry—private equity—isn’t too far off. He remembers and gleefully points out the asset class’s original name, LBO shops. The change (he calls it “Orwellian”) came after the asset class got a bad rap in the late ’80s, when debt to equity-ratios-on deals were as crazy as 90/10.

Tomato, Tomahto, just don’t you dare lump Berkshire Hathaway in with private equity. You may not want to, give his firm’s recent performance, which calls “one of the worst beatings ever.