Dissecting Private Equity's Role in the U.S. Capital Markets
The Private Equity Council today released the latest iteration of a long-term academic study on private equity’s role in the financial market. Not surprisingly, it finds that the industry does not pose significant risks to the financial system at large (particularly when contrasted to investment banks). Here are its six main points, with my gut reactions: 1. Efforts to turn around or strengthen undervalued companies represent a very unlikely source of systemic problems in capital markets. I would agree, if only that’s what private equity was doing prior to the credit crunch. Instead, lots of firms (particularly in the large/mega markets) abandoned buy low/sell high strategy for buy high/sell higher. How many times did we see substantial premiums paid for public companies in the midst of a bull market? How many times did we hear: “This is already a market leader” or “This is a very strong company that we feel could be just a bit stronger?” Very few private equity firms were able to follow the sage words of Rudyard Kipling… 2. Private equity losses are unlikely to be of a cascading nature that could trigger a systemic event. This point here is that PE transactions are financed with less debt than are bank investment holdings. And it’s fair, albeit damning with faint
