Monday, April 18, 2011

Face of Capitalism: PEU

“By the time the bubble burst in 2007, the (private equity) industry had over $1,000bn under management and had become the face of capitalism to some extent."--David Rubenstein, Carlyle Group co-founder
Rubenstein continued on the power of private equity underwriters (PEU's).  FT reported:

Mr Rubenstein says the power of the top-tier buy-out firms has depended on three factors. One, the rates of return “turned out to be better than almost anything else you could do with your money”. Two, the pension funds that invested in private equity groups needed those returns because they were badly underfunded, given their huge and growing liabilities. And finally, the model included taking 20 per cent of the upside of any deal. “If you can make 20 per cent of the profits on other people’s money, you are going to make a lot of money if you are good at what you do.”
Actually, there's a fourth factor driving the power of top-tier PEU's, political patronage.  PEU clubbing, donations and lobbying un-leveled the playing field in their favor.  How did Uncle Sam help?  A Blue White House and Congress provided a projected $26 billion in tax breaks for firms buying back debt on the cheap.  FT cited this strategy as the cause of Apollo's resurgence, which recently employed former benefactor Senator Evan Bayh.

PEU puffery has firms going public, in direct opposition to their long marketed "private competency."  Be clear, PEU's will say almost anything to profitably grow and monetize an asset, while avoiding responsibility for the consequences of their greed and avarice.