Thursday, January 26, 2012

Two Faces on Private Equity

source:  Batman Forever
Warren Buffet's terse characterizations of private equity investors in his shareholder letters were on point: he portrayed bad PE actors who destroyed companies by drowning in them in debt while sucking blood out in management fees and special dividends.  Today's Star Tribune trots out the case of Buffet's Inc., which was beset by a predatory private equity group which also sucked blood out of a turnip and put the company into bankruptcy for the second time. 

So, as part of the  Presidential re-election propaganda machine's aiming at Bain-alumnus Romney, voters can  conclude that all  private equity firms are vultures, no investments ever add jobs, and all just feather the nests of billionaires.  It's certainly a great mantra for election time.

Now, however, go to the interesting case of Calpers, the monster public employee retirement fund of California, which is an institutional gorilla that can command preferences in the market place, but which is also deeply caring and crusading against all forms of corporate opacity, fraud, social insensitivity, environmental degradation, inappropriate political speech, and so on.  Calpers is just like Tommie Lee Jones' character "Two-Face" when he was a crusading district attorney. 

Ironically, many public pension funds are now plowing into alternative investments, principally private equity, chasing the performance enjoyed by Calpers in 2010 when private equity was their best performing asset class, returning 21.5%  and bringing AUM to $226 billion.  On the Calpers site, it appears that in their measurement system, all vintages of private equity investments have returned positive IRRs since their inception.  So, as investors(left side of Two-Face), Calpers is happy to take the outsize returns, but as crusaders for truth and justice, they are his right side and madder than Hades. 

So, which is it?  Private equity investments do create value and sustainable employment. They do no always employ slash and burn strategies in their portfolios.  Some firms, as we know, are bad actors.  Public employees, fresh from their Occupy Wall Street and other protests, can enjoy their enhanced returns from private equity.  It is amazing that Candidate Romney, who above all can speak knowledgeably from experience, about private equity, chooses not to educate the electorate with an informed and balanced view of private equity's role in corporate development. 

How to get justice for private equity?  How about flipping a coin?

No comments: