Category Archives: Private equity

Wolf Richter: First Oil, Now US Natural Gas Plunges, “Negative Igniter” for New Debt Crisis

Yves here. Wolf has been keeping a sharp eye out on how shale gas players were junk bond junkies, and how that is going to lead to a painful withdrawal. Here, he focuses on one of the big drivers of the heavy borrowings: the deep involvement of private equity firms, who make money whether or not the companies they invest in do well, by virtue of all the fees they extract. The precipitous drop in natural gas prices is exposing how bad the downside of a dubious can be, at least for the chump fund investors.

It’s hard to imagine an industry that is a worse candidate for private equity than oil and gas exploration and production. The prototypical private equity purchase is a mature company with steady cash flow. Oil and gas development is capital intensive and the cash flows are unpredictable and volatile, because the commodity prices are unpredictable and volatile.

A less obvious issue is that it actually takes a lot of expertise to run these businesses. This is not like buying a retailer or a metal-bender. Now private equity kingpins flatter themselves into believing that experts are just people they hire, but here, the level of expertise required, and the fact that the majors are way bigger than private equity firms means that the private equity buyers don’t know enough to vet whether the guy they hire is really as good as he says he is. Like all outsiders, they are way too likely to be swayed by the sales pitch and personality rather than competence.* And even with all the money that private equity has thrown at energy plays, it’s not clear that New York commands much respect in Houston.

As one private equity insider wrote in June, ironically just before oil priced peaked:

Jeb Bush: The Forrest Gump of Financial Improprieties?

The Financial Times has an unusual story featured prominently today. As Jeb Bush has made a soft launch of his presidential campaign, the pink paper has published a surprisingly long list of financial relationships that do not put the Florida governor in a particularly good light.

The intriguing part isn’t so much a history of ~~dubious-looking~~ complicated money dealings. It’s the fact that many of them are live.

Private Equity “Money for Nothing” Tax Game as An Example of Elite Lawlessness

Most members of the great unwashed public, when they hear about unfair results of the tax code, like Warren Buffet’s secretary facing a higher tax rate than he does, or private equity and hedge fund barons paying capital gains tax rates on labor income, assume that those outcomes are the result of a combination of the rich getting the tax code changed over time or succeeding in preserving the exploitation of loopholes that should have been closed ages ago.

But there is another category of tax games that are not discussed much in polite company, that of outright abuses. What is disturbing about that behavior is that it has not only become increasingly common, but members of the bar, including those at white shoe firms, are enablers. “Money for nothing” private equity monitoring agreements are a blindingly obvious example.

CalPERS Lowering Private Equity Benchmark to Justify Crappy Performance

It’s remarkable to see the lengths to which CalPERS will go to defend its loyalty to investments strategies that don’t deliver adequate returns relative to their risks. Hedge funds were a long-standing old example, and the new one is private equity.

NYTimes Dealbook’s Dishonest Salvo at Elizabeth Warren Over Calling Out an Unqualified Nominee for Treasury Post

Even though Andrew Ross Sorkin and his mini-empire, the New York Times Dealbook, are reliable defenders of their Big Finance meal tickets, they’ve managed to skim above, if sometimes just barely above, abject intellectual dishonesty. But Dealbook has published not one but three pieces in as many weeks in defense of an unacceptably weak Obama Administration nominee for an important Treasury post, the Under Secretary of Domestic Finance.

The candidate is Antonio Weiss, a Lazard mergers and acquisitions professional who was elevated to head of investment banking in 2009. There’s no doubt that Weiss is accomplished. The non-trivial problem, as Elizabeth Warren and others have pointed out, is that Weiss’ experience and skills have absolutely nothing to do with the Treasury role.

What is striking is the way that Sorkin and his colleagues have launched what amounts to a media war against Warren in defense of Weiss, and have shameless resorted to a drumbeat of Big Lies in the hope that their messaging will stick. The fact that they can’t even mount a proper case on its merits speaks volumes about Weiss’ qualifications for the job.

Eileen Appelbaum and Rosemary Batt: Can Private Equity Be Reformed?

Yves here. This is the third part of an interview by Andrew Dittmer with the authors of an important new book on private equity, Private Equity at Work (see Part 1, Part 2, and Part 3).

This final post focuses on the question of whether private equity can be reformed. Even though there is a long list of possible curbs and fixes, Appelbaum and Batt single out the critical ones that they believe will have the most impact.

Eileen Appelbaum and Rosemary Batt: How Academics Cook Their Studies to Flatter Private Equity

Yves here. This is the third part of an interview by Andrew Dittmer with the authors of an important new book on private equity, Private Equity at Work (see Part 1 and Part 2).

Here, Appelbaum and Batt discuss some important, widely publicized academic studies in which the results were skewed so as to favor the private equity industry.

Transparency Hypocrite BlackRock Doesn’t Believe in Giving Out Info But Likes to Take It

Reader Adrien pointed out an article from the Financial Times from last month, in which the world’s largest fund manager, BlackRock, stood up for the widespread practice in the UK of fund managers insisting that investors, including public pension funds, sign confidentiality agreements. This goes well beyond the objectionable practice in the US, where managers of exotic-seeming strategies like private equity, hedge funds, and infrastructure funds have managed to shroud their activities in secrecy. In the UK, even plain-vanilla fund management strategies, like stock and bond funds, are also subject to this information lockdown.

But as we’ll demonstrate, BlackRock does not walk its talk.

Eileen Appelbaum and Rosemary Batt Explain Private Equity Tricks That Put Companies at Risk

Yves here. This is the second part of an interview by Andrew Dittmer with the authors of an important new book on private equity, Private Equity at Work (see here for Part 1).

In this segment, Eileen Appelbaum and Rosemary Batt describe some of the ways that private equity firms make the companies they buy more vulnerable to bankruptcy, yet get away with it.

Andrew Dittmer: Eileen Appelbaum and Rosemary Batt on How Private Equity Really Works

Yves here. Naked Capitalism contributor Andrew Dittmer, perhaps best known for his series on libertarianism (see Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, and his responses to reader comments) has returned from his overlong hiatus to interview the authors of the highly respected new book, Private Equity at Work.

Eileen Appelbaum and Rosemary Batt have produced a comprehensive, meticulously researched, scrupulously fairminded, and therefore even more devastating assessment of how the private equity industry operates, including its deal and tax structuring methods, its impact on employment, and whether its returns are all they are purported to be. Their work was reviewed in the New York Review of Books; we also discussed it in this post.

Earlier this year, Andrew spoke with Appelbaum and Batt, and the first part of their discussion covers the problematic relationship between private equity funds (general partners) and their investors (limited partners) and how private equity affects other businesses.

Big Investors Rebelling Against Private Equity Fees

In a remarkable and long-overdue change in attitude, institutional investors are starting to tell private equity titans that they think they don’t earn their outsized pay. And that’s before you get to all the grifting they’ve been exposed to be doing on top of that.

The Wall Street Journal described a confrontation at a conference in Paris, with a pension fund manager responsible overseeing private equity investments calling out the unjustifiable level of private equity fees.

Private Equity Firms Start ‘Fessing Up to Cheating

The Wall Street Journal describes how some private equity firms are attempting to clean up their act by admitting to dubious practices in revised regulatory filings with the SEC.

There’s a wee problem with this approach. Securities law is not like the Catholic Church, where confession and a promise not to sin again buys you redemption.

Private Equity Titan Blackstone Admits New Normal of Lousy Returns, Proposes Changes to Preserve Its Profits

Private equity continues to make headlines, and not in a good way, despite industry efforts to spin otherwise. The latest shoe to drop is that private equity firms are trying to rewrite some well-established fund terms to allow them to continue to rake in egregious profits even as the returns of most funds have underperformed the stock market.

Exposing More Super Secret Private Equity Limited Partnership Agreements

Private equity fund managers keep insisting that private equity limited partnership agreements need to remain confidential or their businesses will suffer irreparable harm. We’ve already shown that claim to be ludicrous.

We published a dozen of these supposedly sacrosanct documents at the end of May. They had been accidentally made public by the Pennsylvania Treasury, but no one seemed to have noticed. They included funds of major industry players such as KKR, TPG, and Cerberus. Yet miraculously, they sky has not fallen in on their businesses as a result of the release of this information. We have obtained ten more limited partnership agreements from a source authorized to receive them who is not bound by a confidentiality agreement. These include limited partnership agreements from Blackstone, Oak Hill, and New Mountain, as well as smaller players. You can see all these limited partnership agreements here.