Most of our readers know the broad outlines of the PE performance racket but for anyone looking for a last minute stocking stuffer, the reviewer seems impressed.
From Spears' Magazine, November 12:
‘The Myth of Private Equity’ by Jeffrey C Hooke deftly exposes the shortcomings of the private equity world
Jeffrey C Hooke’s new book, ‘The Myth of Private Equity: An Inside Look at Wall Street’s Transformative Investments’ is an authoritative assessment of the private equity world deftly exposes its shortcomings, writes Christopher Silvester
The clue is in the title. Jeffrey C Hooke, a professor of finance at Johns Hopkins Carey Business School, is an arch-sceptic when it comes to the private equity industry. He believes that 65 per cent of it – the part which funds leveraged buyouts (LBOs) – is one giant racket, and that its claim to produce better returns than the stock market is bogus. ‘Indeed,’ he writes, ‘independent academic studies show that since 2006, private equity funds underperformed relevant public indices, a fact that is easily eclipsed by the Wall Street marketing machine.’
The first LBO to gain the attention of the media was that for greetings card manufacturer Gibson Greetings in 1983. In the next five years, until the infamous LBO of RJR Nabisco by Kohlberg Kravis Roberts & Co, America experienced its first buyout boom, ‘an underpinning for the 1980s culture of greed’.
Given that most private equity (PE) funds were LBO blind pools, they were inherently risky, in addition to which they were loaded with debt. They also required investors to commit funds for ten years as part of a no-cut contract and pay vast fees regardless of the outcome. But the rise of modern portfolio theory (MPT) meant institutional investors were encouraged to hold a ‘core’ portfolio of traditional assets, such as publicly traded stocks and bonds, and ‘satellite’ portfolios of alternative assets, such as PE and hedge funds.
The LBO boom stalled in the early 1990s after some notable failures but returned with a vengeance in the mid-1990s, with Wall Street having rebranded ‘debt-laden takeover into private equity, a term that conveys a softer image and a more constructive tone than leveraged buyout’. When the stock market fell back after the dotcom boom and bust, institutional investors turned to PE funds as a form of downside protection. There was a 500 per cent increase in deal volume between 2002 and 2007, another fallback during the 2008-09 global financial crisis, and then another long rally despite prominent PE deals ending in bankruptcy....
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