“Damning verdict on buy-out groups” was the headline that greeted members of the UK's financial community on Monday in the Financial Times (FT). It was eye-catching stuff: perhaps some heavy-hitting research had concluded, or the findings from a government inquiry had been released?
Not quite. The prominently placed article referred to a 47-page paper written by former banker Peter Morris for the Centre for the Study of Financial Innovation (FSCI), a London-based think tank.
The report levels some serious allegations at the private equity industry, namely: that LP-GP interests are misaligned; that, discounting leverage, the asset class does not outperform public markets; and that “sophisticated investors” only invest in the asset class because they either don't understand the returns data or want to access leverage “under the table”.
The report appears flawed on a number of levels. Its claims on returns fly in the face of a host of independently compiled data from the likes of State Street and Thomson Reuters. The claims about “sophisticated investors” lack supporting evidence and again contradict numerous surveys of seasoned institutional investors whose appetite for the asset class – and alternatives in general – seems hard to dismiss on grounds of ignorance or worse (see, for instance, the one recently undertaken by JPMorgan Asset Management). And while the issues it discusses around management fees and carried interest are more real, these are already being debated openly within the industry by GPs and LPs.
Perhaps more significant than the report itself was the treatment it received in the FT, for so many the journal of record and an authoritative voice on business and finance.
The first story laid out the charges leveled at the private equity industry with some choice adjectives: “disappointing returns”, “fat fees” and “glaring conflicts of interest”. Several paragraphs of the report's “findings” were tempered by just one sentence of industry response from Simon Walker, the chief executive officer of the British Private Equity and Venture Capital Association (BVCA).
Readers who ventured further into the broadsheet would find a longer analysis – or more accurately a précis – of the CSFI paper, with a similar mismatch between the allegations and the defence.
Meanwhile, a piece by columnist Tony Jackson headlined “Heads private equity wins, tails you lose”, faithfully summarised the main allegations in Morris's report, delivered a misleading representation of how the private equity fee structure works, and came to this conclusion: “I am not entirely sure why investors are still so keen on private equity. But I would rather those managing my pension stayed out of it.”
An unquestioning regurgitation of opinion such as this is not the sort of analysis that readers have come to expect from the pink paper. From the many conversations PEO has had about the coverage, it was clear the private equity industry agreed on this point. In the newspaper's defence, it published letters during the following week from private equity firm Duke Street and US lobbying group the Private Equity Council countering the claims made in the report. It also ran a follow-up article giving voice to those defending the industry.
It remains telling nonetheless that the paper chose to lead with an article that was based on a highly negative view of the asset class. It seemed to confirm the view of many both within and without the industry that the FT regards private equity as deeply suspect. This is notwithstanding that its editor Lionel Barber, speaking at the BVCA chairman's dinner in March, told those present his newspaper recognised private equity as a “force for good”.
To private equity, the episode matters not only because the FT is such an influential newspaper. It also shows there are still people – both within the financial services sector and outside it – who dismiss private equity as a leverage-driven, greed-based industry, which responsible fiduciaries should shun.
The instinct amongst a significant body of opinion formers today is to regard the asset class as guilty as charged. If it’s not careful, the private equity industry is going to find its reputation damaged irreversibly.