Friday Letter: Who cares about private equity?

Private equity was the ’hot topic’ at Davos, and it continues to preoccupy Wall Street and European bankers. However, people outside this rather small circle are having a hard time understanding what the growth of private equity should mean to them. This ambivalence could present a challenge to the continued success of the industry.  

Just over the past week, the news was full of evidence of the supersizing of private equity. Apollo Management has closed its latest fund on $10.1 billion, PEO reported. Blackstone is smoothing the way with its LPs toward a $13.25 billion close. Yesterday, Kohlberg Kravis Roberts met with one of its two most important LPs, Washington State Investment Board, to seek approval for what may be the largest LP commitment ever. And the market is still buzzing about Apax man Martin Halusa’s reported comment at Davos about how the next decade might see the creation of a $100 billion private equity fund.

At a separate gathering Wednesday, where the money in play was of a considerably smaller magnitude, three New York financial journalists sat down to dinner and to compare notes – one who writes only about private equity and for a private equity audience, the other two employed by a major news service with millions of readers, most of them connected to the finance world through the stock market. A provocative question was raised – why should these people care about private equity?

Perhaps they shouldn’t. After all, the legions of common shareholders, pensioners and defined-contributors cannot participate directly in the gains and losses of private equity funds. The newspaper-reading public do not tend to be owners of big-EBITDA businesses, nor do they make a habit of buying tranches of syndicated debt.

But gradually, the public-market masses may note certain trends, and the recurrence of the words “private equity” “alternative investments” or “hedge funds” attached to them. Their employer may be bought by a private equity fund. The top executives of their publicly traded portfolio companies may leave to pursue privately backed opportunities. A stock they once owned may be returned to them in cash following a take-private. The managers of their best mutual funds may leave to join hedge funds. Wherever there is opportunity for a business to realise an opportunity for great profit, shareholders may find that opportunity siphoned off by a private fund.

Given this spectrum of possible interactions between the common man and the uncommon GP, what reason does anyone who encounters private equity have to cheer it on? For one, they may be hired by a well-run and growing private equity-backed company. Beyond that, explanations about unlocking value and fueling efficiencies may be too esoteric for the average investor to swallow. Oh yes, your state pension fund might get a nice distribution – whoop dee doo!

The European Private Equity and Venture Capital Association was wise recently to publicise statistics about the jobs created by private equity across Europe – this the public and government officials can understand. The industry must clearly present the benefits it bestows on society, otherwise the world of private funds may grow to be perceived more like a menace to stability designed to enrich a far-removed elite – which in turn could easily lead to regulatory action. The bigger they get, the more GPs should care about how their world is perceived by outsiders.