There’s a new article from Pitchbook which discusses some of the serious issues confronting a portion of the private equity industry as we head into the 2020 U.S. Elections.
“While the article uses the term “private equity” generally (which, for the less informed, is an overly broad term used to describe a whole host of funding categories, two of which are venture and angel capital), what the article really addresses is the obsessive need for “privacy” with which one category, the traditional “leveraged buyout” industry, has, historically been preoccupied. While humorous, the anecdote about Stephen Feinberg, the co-founder of Cerberus Capital Management, is particularly telling:
“We try to hide religiously”, Feinberg reportedly told a group of investors. “If anyone at Cerberus has his picture in the paper and a picture of his apartment, we will do more than fire that person. We will kill him. The jail sentence will be worth it.“
The premise of the article is that the industry should be more transparent in order to ward off the attacks from Elizabeth Warren and others who are hell-bent in wanting to remake the “private equity” industry in an image more to their liking. This, of course, is being driven by the readily apparent (to anyone other than those who are either brain dead or already residing in a graveyard) excesses that many of us have seen in which the leveraged-buyout industry, i.e., Bain Capital, KKR, Blackstone, etc, have indulged.
While, in my opinion and as a general rule, transparency is a good thing, it certainly makes operating a business, especially one that might be in an industry that’s highly competitive, much, much more challenging. That’s been the traditional mantra of the leveraged-buyout industry players, where finding ways to make a business better and more profitable has always been a formidable task, and one where there is often a substantial, and sometimes unquantifiable, risk. Having to do so in the bright light of day makes it that much more difficult.
While, as the article points out, some of these leveraged buyout firms have responded by moving from, first, private partnerships for accredited investors and large institutions, to public partnerships, to, finally, public corporations, all in an attempt to introduce more transparency into their practices and in order to make their shares more open to mutual funds and ETFs found in many retirement accounts, it still doesn’t solve the most fundamental problem: how to quiet the critics and turn more voters into supporters of the system instead of enemies of it.
I believe there’s a better way to make the whole debate around “private equity (really, leveraged buyout firms) disappear: make members of the general public, partners, in every sense of the word, to the partners whose names adorn the letterhead of some of these firms. Remove the barriers to investing that both the elites and government have installed in order to keep the ordinary investor from participating in the spoils of some of the richest and most profitable areas of our economy. The rules constraining investment by ordinary individuals have eroded our national wealth and have led to the excessive concentration of wealth that now threatens to up-end our entire economy, and capitalism as our governing economic system, in the process.
Let the public invest in these deals, not in the back-end scraps that have been offered in the past, but rather along with those investors who have always been given preference, the accredited individual investors and the institutions. Permit the public to invest in a true private partnership, but one in which the ordinary retail investor can participate as a full equal, on a level playing field.
All that’s required is shifting one’s thinking from one where the universe is viewed as a universe of scarcity (i.e., someone’s great deal has to come at the expense of someone else getting screwed out of their deal) to one of abundance. Once you do that, it’s easy to see the road that takes you away from the potentially catastrophic threats that currently confront private equity.
And, its important to bear in mind, that these threats are not imaginary or ones that can ultimately be ignored or eliminated simply by re-electing Trump. There are systemic problems with the current structure of private equity in general; but when it comes to leveraged buyouts, the fix is relatively easy. More participation by more people who have previously been denied access to the benefits of the leveraged-buyout model.
Remember, there are upwards of 130 million potential voters out there; let them buy a piece of the pie and make them supporters instead of critics; make more of them part of the solution and they’ll no longer be part of the problem.
Ray Burrasca is the Executive Vice President and Chief Financial Officer of Archimedes’ Offspring, an unincorporated “umbrella” organization whose mission is to make “reasonable returns investing” affordable for the ordinary Joe’s and Jane’s and, in the process, to reinvent innovation in America. He can be reached at ray@archimedesoffspring.com or by phone at (303) 910-2344.
