new interest: Private Equity
as mentioned in previous posts i go through random periods of intense interest in a certain subjects - last time it was shipping. i research the key players, the strengths and weaknesses and anything else of note. At the moment its private equity. I am about to wrap up a book by ronald cohen (apax partners) and have read a fair bit about rubenstein (above, carlye group) and schwarzmann (blackstone). There is nothing particularly interesting to say about the players except the fact that nearly all seemed to do an MBA at Harvard (though rubenstein did not). That’s the main thing they have in common and with that is likely to come smarts. They all set up shop in either the late 70s or 80s when private equity was virtually unknown.
what I like about PE is the raw business like manner which is necessary to succeed. I like the fact underperforming public companies can be taken private, improved and sold. The glare of the public markets can often lead CEOS astray with too much focus being placed on the next quaterly earnings numbers. It will be intereting to see how the firms do in these tough economic times. Schwarzmann seems to think that this is a great opportunity to buy - everything is discounted and he is probably right.
The problem with PE is that it saddles companies with debt while PE bosses offer as little equity as possible for maximum gearing/leaverage/debt. This is business but I doubt getting those favourable loan conditions will continue to exist. PE bossess will have to offer up more equity/cash and PE bosses won’t be able to spend spend spend in order to boost company performance. Success will be about adding real value rather than financial manipulation.
I believe it was a german finance minister who called private equity firms “locusts”. I think this is unfair. In my opinion they add more value than traditional investment banks perhaps even more than sovreign wealth funds. Its not uncommon for PE firms to actively manage a company ensuring value is added and good returns are made. what’s wrong with that?
PE firms may be undertaxed (this is being fixed), they may cut jobs and they may rely on too much debt but I believe they offer a net positive to the economy. this current economic crisis may see the death of the investment bank but I see PE lasting for some time to come. In many ways PE is a business man’s dream - you get to work on many different companies and push them towards success and unlike a consultant you actually have the last say!
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