Yes.*
Absolutely first rate reporting from The Guardian, October 10:
From football clubs to water companies, music catalogues to care homes, private equity has infiltrated almost every facet of modern life in its endless search to maximise profits
Whenever
I ponder the enormity of the multitrillion-dollar industry known as
private equity, I picture the lavish parties thrown by Stephen
Schwarzman – and then I think of the root canals. Schwarzman is the
billionaire impresario of Blackstone, the world’s most colossal private
equity firm. In August, he hosted a 200-person housewarming party at his
$27m (£21m) French neoclassical mansion in Newport, Rhode Island. It
was a modest affair compared to the grand soiree he threw himself at his
Palm Beach, Florida, estate for his 70th birthday, in 2017. That
black-tie bash was itself a sequel to his multimillion-dollar 60th, in
2007, which became a symbol of the sort of Wall Street excess that led
to the global financial crisis. The Palm Beach party, which some reports
say cost more than $10m,
featured Venetian gondolas, Arabian camels, Mongolian acrobats and a
giant cake in the shape of a Chinese temple. “Brilliantly stimulating”
was the billionaire industrialist David Koch’s review.
Gwen Stefani serenaded Schwarzman as Jared Kushner, Ivanka Trump and
several members of her father’s cabinet looked on. It was a world in
miniature, ruled over by a modern Croesus – the perfect symbol for a
form of money-making that has infiltrated almost every facet of modern
life.
Preschools and funeral homes, car washes
and copper mines, dermatologists and datacentres – private equity is
anywhere and everywhere that money changes hands. If it can in any way
be marketed or monetised, private equity firms have bought it – from municipal water supplies to European football clubs to the music catalogue of the rock group Queen.
By some estimates, these firms now control more than $13tn invested in
more than 50,000 companies worldwide. “We cannot overestimate the reach
of private equity across the global economy,” Sachin Khajuria, a former
partner at Apollo Global Management, which manages half a trillion
dollars in assets, wrote in 2022.
It’s not just that hundreds of millions of us
interact with at least one private equity-owned business every day. More
and more people, especially the relatively poor, may live almost their
entire lives in systems owned by one or another private equity firm:
financiers are their landlords, their electricity providers, their ride
to work, their employers, their doctors, their debt collectors. Private
equity firms and related asset managers “increasingly own the physical
as well as financial world around us,” the scholar Brett Christophers writes.
“All of our lives are now part of their investment portfolios.” This is
true not only in the US, where private equity has been on a spree since
the late 1970s, but increasingly in the rest of the world, too. In
recent years, private equity firms have spent hundreds of billions of
dollars snaffling up businesses from Canada to Cambodia, Australia to
the UK.
As private equity has spread, so have dire warnings about its effects. The vultures and vampires of the industry have been decried almost everywhere in the media that isn’t already owned by private equity.
In the span of a single week last year, two major and almost
identically titled books were published in the US – Plunder: Private
Equity’s Plan to Pillage America and These Are the Plunderers:
How Private Equity Runs – and Wrecks – America. Private equity is “greed
wrapped in the American flag of efficiency, looting justified by solid
investment returns”, the authors of Plunderers write. “The marauders
answer to almost no one.”
This
is where the baby root canals come in, as a grotesque epitome of the
industry’s modus operandi. According to multiple media investigations
and a US Senate inquiry, in order to drive up profits, private equity-controlled dental chains have induced children to undergo multiple unnecessary root canals.
“I have watched them drilling perfectly healthy teeth multiple times a
day every day,” a dental assistant in a private equity-owned practice
told reporters. One child even died as a result.
To its many critics, private equity is a shining example of “asshole
capitalism”, but baby root canals make one feel even that label is a
touch too kind.
Unsurprisingly, practitioners
of private equity see their industry differently. Yes, they admit, there
have been a few bad actors, and yes, a handful of bad deals, but by and
large private equity firms are not full of profiteering sociopaths
merrily making the world a crappier place. Rather, they’re the necessary
fertilisers of growth and innovation, using their superior talents to
rid companies of bad management, rejuvenate sluggish businesses and grow
the economic pie so we can all continue to enjoy the relative
prosperity of our developed societies. It’s just capitalism doing what
capitalism does best. They call it “value creation”.
What’s more, they say they’re providing amazing
returns to their investors, who might well include you, dear reader, if
you happen to have a pension. “Hopefully we can get the news out there
that, actually, private equity’s been a great thing for America,”
Stephen Pagliuca, the billionaire co-chairman of Bain Capital, said at Davos in 2020.
David Rubenstein, the billionaire founder of the Carlyle Group, another
of the world’s largest private equity firms, goes further. “Private
equity,” he likes to say, “is the highest calling of mankind.”
Whatever
good or ill there is in private equity is not just about greedy sinners
or enterprising saints. Whether acquiring a bakery that makes chocolate
chip cookies or the nursing home where your grandmother is living out
her days, private equity relies on the same basic business model: the
leveraged buyout. These transactions – which account for roughly three
out of every four dollars of all private equity deals – are frequently
compared to house flipping: you buy a business using a ton of debt, or
leverage, the way you buy a house with a mortgage; then you try to sell
it for a tidy profit after you replace the carpets (or, better still,
the market goes up). Unlike buying a house, however, the debt isn’t the
responsibility of the buyer; it sits on the balance sheet of the
acquired company. As strange as it sounds, it’s sort of like the company
is forced to take out a loan to buy itself....
Following on yesterday's "The
Guy Who Wrote “An Inconvenient Fact: Private Equity Returns & the
Billionaire Factory” Does Not Genuflect At The Alter Of Bain, Carlyle
and Blackstone"
Sometimes it's hard to tell the difference between a bankruptcy bust-out/bleed-out fraud and private equity.
Also between private equity with its internal rate of return, IRR, and piracy with its eerily similar Arrgh, but that's a whole 'nother post.
Or: Former CIA director Petraeus joins KKR backed security firm"
Um, why is private equity backing a "security firm"?
There aren't any assets to strip, or leverage before a bankruptcy bust-out.....
*****
....At
least MI6's former top spook, Sir Richard B. Dearlove, went the
traditional somewhat-murky-African-extractive-industry route, but PE
backed security companies? That just seems creepy.
And: Private Equity: "having your industry compared to a Ponzi scheme is less than ideal"
....
My question going forward is: "Should times get really tough will we
see a return to the asset stripping/bankruptcy bust-out model?"
Wait. Did I say that out loud? I meant "will we see a semi-permanent step-change to lower valuations that trap capital?"
Yeah that's it, that's what I meant.
And related:
From June 2019's The Hidden Risks In Shorting Dogs:
One of the scariest concerns when shorting non-frauds in a bull market
is that the very things that make a company a laggard and seemingly
offer a tempting short—or the short leg of a pair trade—are things that
attract the private equity vultures. This is why, for 2 1/2 years when
talking about the mess that American packaged foods had become, we would
obliquely, and sometimes not so obliquely warn:
March 7, 2017
M&A In European Food
I'm not sure that consumer packaged goods is the area to be in, at least
not in the U.S. and not based on names like Kellogg or General Mills.
For a quarter-century those manufacturers ratcheted prices as though
they were tobacco companies but people find it easier to give up their
Cheerios than their cigarettes.
The managements milked that approach for pretty much all it was worth
so, as operating entities, they aren't all that attractive but someone
will decide the only thing left to do is to asset strip or dividend
recap the life out of the former cash cows.
Top o'the market to ya....
Speaking of the Private Equity model, here is sheer genius from William Banzai, last seen in
"...Since 2006, Private Equity Has Produced Only S&P 500 Returns While Reaping $400+ Billion in Fees"
The discussion of hydraulic models of the economy in this morning's "If The FT's Izabella Kaminska Doesn't Start Posting To Alphaville...." reminded me of William Banzai's take on the Phillips model but with bonus receptacles and fee siphons:
Genius squared.from a post on GE's Mark I nuclear reactor at ZeroHedge!
***
Compare/contrast with the original:
"The computer model that once explained the British economy (and the new one that explains the world)"
From the New York Times:
Two weeks ago, while visiting Cambridge University, I arranged to
have lunch with my friend Allan McRobie. He’s a professor of
engineering, so it seemed a bit strange that he kept insisting we meet
at the department of applied economics. “There’s something there
you’ve really got to see,” he said in his Liverpudlian lilt. “It’s
utterly fab. Just brilliant. The Phillips machine — it uses water to
predict the economy.”...MORE
See also Warren:
Berkshire Hathaway as Idealized Private Equity
We quoted Buffett on P.E. in last month's "How Vulture Capitalists Ate Toys 'R' Us", updated below....
****
The quote was:
And then there's 2011's "The Porn Shop Operators Strike Again: Harry & David files for bankruptcy";
``You can sell it to Berkshire, and
we'll put it in the Metropolitan Museum; it'll have a wing all by
itself; it'll be there forever,'' he says at the February meeting.
``Or
you can sell it to some porn shop operator, and he'll take the painting
and he'll make the boobs a little bigger and he'll stick it up in the
window, and some other guy will come along in a raincoat, and he'll buy
it.''
-Warren Buffett
On why a business may prefer selling to Berkshire Hathaway rather than a private equity firm.
I know Warren is talking down the bidding pressure that PE firms might
put on the price he has to pay for privately held businesses but looking
at his comments on PE over the years it's more than that:
He actually loathes private equity and its practitioners....
And so many more.
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