A Duke University law professor questioned the purpose of private equity.
"private equity emerged as a knight in shining armor, reuniting ownership and control in corporate America and turning bloated, inefficient companies into slimmed-down cash machines."Her thesis is private equity underwriter's (PEU) original purpose was to reform corporate governance. PEU ownership turned the board into an insider group laser focused on returning large amounts of cash to sponsor via deal fees, management fees, special dividends/distributions and finally flipping the company for a multiple of its original purchase price. Along the way sponsor PEU placed as little up front cash in the project (equity), saddling the company with massive debt relative to its prior inefficient public ownership.
The professor cites how the corporate world has changed and stated private equity's current distinctive competency might be providing "cheap debt" to companies. I am not sure that is true as riskier junk bonds pay more in interest than investment grade bonds. Most private equity transactions are not investment grade so they pay higher interest rates.
Cheap debt is a function of The Federal Reserve Bank and top leaders Jay Powell and Randall Quarles are former PEU boys. Both worked for Washington, D.C. based The Carlyle Group.
One frequent spinner of the "knight in shining armor" story is Carlyle Group co-founder David Rubenstein. He sat on the Duke University board until from 2005-2017, serving the last four years as board chair and made significant contributions to a number of Duke programs. Rubenstein has his own Duke University webpage.
Do knights in shining armor lead on a family owned company, only to foreclose via highly discounted debt? The deal jettisoned the employee pension. That's the Carlyle Brintons story.
Do rescuing knights get banned from the World Bank for 33 months for procurement violations? That's Carlyle and ARINC.
Do knights go bankrupt from bad financial bets not revealed in SEC filings? That's Carlyle and Semgroup.
There are many more black knight PEU stories for Carlyle. Older examples include LifeCare, Manorcare, Vought Aircraft, and Synagro. The newest is Carlyle's abandonment of the Corpus Christi Harbor Island oil terminal.
I don't believe the greed and leverage boys were ever knights in shining armor, not in the '80's and not today. They are obsessed with image and utilize every lever to shape the world to their advantage.
Rather than White Knight private equity is more like a Great White Shark. The PEU appetite for money is insatiable. Watch out for financial sharks when they gather in groups at Davos in Desert, like their great white counterparts, currently off North Carolina's Outer Banks.
