Private equity shills are readying the Blame Cannon for the industry’s widely forecast fall in returns.
Who are the allies of the private equity firms attempting to villianize as the cause of deteriorating performance? Not the 0.1% Masters of the Universe, who are always and every the sole cause of Good Things but never never to be found when Bad Things occur. No, it’s those evil “populists” interfering with the proper operation of the world according to private equity that is messing up returns.
We’re not making this up. From the Wall Street Journal:
The rise of “populist” politicians in western nations could challenge the ability of private-equity firms to do business and make money, according to a report from Hamilton Lane, one of the largest advisers to investors in the industry.
The backlash against globalization may cause higher taxes on private-equity firms, create more regulation, drive more volatility and restrict economic growth, Hamilton Lane’s annual review said.
This is utterly ludicrous if you’ve been paying attention.
From the first half of 2015, the average EBITDA multiple for PE purchases was over 10X, higher than the peak of the last cycle, in 2007. Even limited partners who are leery of saying a bad word about private equity, like CIO Chris Ailman of CalSTRS, described PE acquisitions as “priced to perfection”. The trading prices of the private equity firms that are public shows that equity market investors believe that private equity firms will not earn any carry fees over the next couple of years.
And as we’ve pointed out repeatedly, since the second half of 2015, senior officers of prominent private equity firms have increasingly been warning that private equity returns going forward will be lower than levels of the past. And none of them used Putin, um, Trump, um populism as the excuse for why returns were going to decline.
Hamilton Lane has more reason than most to blame private equity’s declining fortunes on external forces rather than the obvious factors of too much money chasing too many deals, and if the Fed ever pulls it off, rising interest rates being particularly punitive to high risk strategies like private equity, which is fundamentally levered equity. As we’ve pointed out, private equity has doubled its share of global equity from 2005 to 2014.
Hamilton Lane is not just a consultant to private equity; it is deeply conflicted by virtue of being a private equity fund of fund manager, which means it needs to play nice with the general partners in order to maintain access to funds. And the limited partners it has advised on private equity need excuses they can take to their boards and broader constituencies when private equity returns fizzle. So it’s easy to blame those nasty anti-capitalists rather than admit that private equity has always been a cyclical play and the end of a cycle is nigh. In fact, it should have occurred after the 2007 deal frenzy, but private equity was an accidental beneficiary of central banks’ “rescue the financial system” emergency operations, and got a stay of execution.
In a sign that the public is getting smarter about private equity, 80% of the comments on the Wall Street Journal story were not buying what Hamilton Lane was selling. The other 20% were general criticism of populism rather than votes of support for private equity.
This skew should not be surprising given some of the strained claims Hamilton Lane made. Notice in the quote above that the first, and presumably therefore the most important problem for private equity was “higher taxes on private-equity firms,” which almost certainly refers to closing the carried interest loophole. But readers are supposed to believe that that would dent their ability to make money for investors, when those investors are almost without exception exempt from US taxes.
Now some private equity industry members have stomped their feet and said they’d quit if they had to pay more taxes. It’s hard to take this hissy fit seriously since there are not other lines of work in which they’d earn remotely comparable pay even with a bigger tax bill. At the largest firms, the typical annual pay is eight figures, and for the top dogs at big and some medium-large funds, nine figures.
And it’s not as if “talent” makes as much of a difference as the general partners would have you believe. Industry data shows that no one has a secret sauce. Top quartile funds are less likely to perform well in the next period then by chance. An investor in private equity should stop wasting time picking winners. They should try to avoid crooks and otherwise attempt to index.
So who might leave the industry if anyone? The departures are more likely to take place at the smallest funds or ones with mediocre performance, since the difference in tax treatment would have a bigger impact on the ability of the principals to maintain what is perceived to be an adequate lifestyle.
Ironically, thinning out the marginal players is if anything likely to be salutary for industry performance. With too much competition for deals, the winning bid is often made by someone who is desperate to win a deal (as in their investors perceive them to be too slow at putting money to work) or not well informed.
But the Hamilton Lane whinge is a harbinger of the sort of excuses you can expect to hear from both general partners and limited partners over the coming years, the tired old “whocoulddanode?” in new garb.
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Of course we get upset when private equity returns are low. Just as the children of abusive parents still want them to be able to pay the mortgage.
While the “blame cannon” is a worthy phrase, I prefer the “blame-thrower” from the film Mystery Men.
I find it hard to tell how effective this tactic is going to be. While the comments sections of the world may not buy it, they are not the audience. The elite are the audience. Trying to sell them the narrative of being under threat and “first they came for the private equity funds” might just work.
The comment section of the Wall Street Journal is upper income. You have to be a subscriber.
The average household income of the WSJ is $270,000 and the average value of total household financial accounts (liquid assets) plus principal residence plus additional real estate is $2.3 million. $270,000 is in the top 3%
Huh, well a) its going to take a bit of scrubbing to get all this egg off my face and b) its somewhat heartening to hear that even the target audience isn’t buying it.
Very good point. I saw the attack as also being a dog whistle to the WSJ readers that the “peasants are getting restless” and “we” should begin to demonize the term “populist” as much as possible to eliminate any opposition to “our” reign.
No, Hamilton Lane wrote this in their annual report. They don’t care about WSJ readers, since (contrary to public perceptions) wealth people are not significant investors in private equity. The biggest investors are public pension funds, sovereign wealth funds, endowments, foundations, private pension funds. Hamilton Lane speaks directly to those investor groups through its own communication channels, such as PR directed to them and the trade press.
I suppose complaining in the mouth piece of monied interests sets the political stage for policy changes due after the election. Please President Clinton and new Congress, be nice! We promise nice jobs and campaign cash a plenty as well as plumb jobs for family members as long as you leave us alone to continue extracting economic rents from the rubes.
Besides lobbying government, one of the things that the large redundant banks, private equity firms, and large hedge funds do excel at are programs of propaganda and persuasion, which are typically created and conducted by independent professional services firms. They try different messages to see which ones gain traction in shaping public/target audience perception and which don’t.
I expect the “It’s the populists fault” meme to be used often in an effort to deflect criticism for a broad range of government, finance and business policy failures over the next 2-3 years in order to preempt and justify curtailment of substantive regulatory, legal and legislative initiatives to change the status quo. I further expect this emergent messaging will not be limited to an effort to divert criticism and legal attention away from poor financing/underwriting decisions and representations to limited partners by large private equity firms.
I know that the GPs are absolutely shameless. Still I find it hard to believe they can keep a straight face while saying “If I have to pay more taxes my LPs (the source of my money) will invest less.” Believe me the GPs see it as their money even if it came from someone else’s pocket.
Even more non-understandable is how the media, consultants, regulators and LPs let them get away with it and even repeat it.
Bloomberg just had an article about the Blackstone CEO complaining about how his stock price is too low.
Tony James of Blackstone is pushing a plan to let the common man invest in alternatives.
(Hint: Mr James people can buy Blackstone’s stock in a an IRA if they so choose, so mission accomplished.)
Thanks for this post. Someone, call the wambulance.
Interesting to see how they play their games and what propaganda they use to enhance themselves at the expense of the dreaded, disgusting, worthless rabble, who should neither been seen, nor heard… but our pockets are definitely ripe for picking.
Thanks for an interesting, insightful post. Greedy bastards.
I wonder if he realizes the worthless rabble are all armed?
I like the sound of this message from Hamilton Lane….it’s very empowering! Who knew it was this easy to disrupt the financial titans from doing their looting? :)
More seriously, yes, Yves has the story right. The private equity field is saturated and the opportunity for arbitrage has long past. They’re running on past performances and marketing brand fumes. The decline was inevitable.
Where are these populists? I’d really like to see one. A REAL LIVE ONE.
Stealing pensions not as popular as it used to be?
Been in the PE Industry for decades. I am an unapologetic capitalist. Still can’tr find one legit reason for the special treatment of carried interest and related nonsense. They are not putting their capital at risk to get these returns, it is just income and should be taxed accordingly.
Low multiples at purchase, high multiples at sale. It’s how you make good returns. If you do that, the government or any other stakeholder is not an issue.
Right, and most funds aren’t set up to be patient. They are locked psychologically or due to partner/MD income expectations to raise a fund every 4 years or so, which means they can’t sit on “dry powder”. By contrast, that’s the key to Warren Buffett’s success in reinsurance. Despite having to carry overhead, which most companies treat as needing to produce profits all the time, Buffett expects, indeed wants, that unit to do squat until there is a “hard market” as in very advantageous pricing. That can take place in as few as three days every 18 months or so.
PE obviously does not have that degree of latitude. Doing deals at 10x EBITDA with interest rates at record lows is not going to lead to happy outcomes in the overwhelming majority of cases.
“He who is an ‘unapologetic capitalist’ knows an apology is needed, but as yet, refuses to fully admit that fact to themselves”. (Zeitgeist)
If populism is defined as “what is good for most of the people, regardless of justice” and elitism is defined as “what is good for the few, regardless of justice” then, if we are to have an unjust system anyway, then populism is greatly to be preferred over elitism.
But, of course, we should have a just system and that includes restitution. And it should be well tempered with mercy too since absolute justice is impossible, humanly speaking.