There are some interesting articles doing the rounds about private equity. There’s one in Forbes with the headline “An Unknown Tax Dodge Is Creating Buyout Billionaires By The Dozen”. And The Wall Street Journal has a story headlined “CEO Schwarzman Defends Blackstone as Firm’s Profit Climbs” as the Blackstone Group delivered its latest quarterly earnings results.
According to Forbes, general partners in private equity firms are enriching themselves to the tune of billions by selling small percentages of their general partnerships through an especially tax-efficient process that converts their income into capital gains at a lower tax rate and with a far longer payment timeline. Blackstone, meanwhile, has almost doubled its earnings year-on-year, as Chief Executive Officer Steven Schwarzman defended the firm’s handling of its portfolio companies.
This seems like a can that Mr. Schwarzman is destined to carry, ever since his notorious 60th birthday bash of 2007 featuring that celebrity party-goer Donald Trump, among others. No wonder, since his 70th birthday party in 2017 featured singer Gwen Stefani, camels, and many other fruits of all the wonderful value his firm is busy creating for America’s pensioners… hold on, surely some mistake here?
I’m sorry, but is all this surplus wealth really legitimate reward for the hard work and value-creative nous of private equity’s company rebuilders? Not at 2% management fees it’s not. Remember, private equity funds are overwhelmingly fuelled by their limited partner (LP) investors. Anything they buy is being bought either with that money, or with bank debt that has been raised against the future earnings of what they’ve just bought. Who should the proceeds belong to? And if it was so difficult, why would big LPs like the Canada Pension Plan Investment Board be getting in on the act with their own direct investments?
All this is fuelled by a global institutional investor community that has driven active equity funds practically to the wall with the mantra of cutting costs and paying less to get less from passive funds. And yet these same institutions appear content to enrich private equity barons with obscene amounts of money that could have gone to their own pensioners or other stakeholders. Private equity tycoons may not be the most common intelligent life form in the richest One Percent, but they certainly appear able to generate an outsize share of resentment from the other 99%. With reason.
Investment committees, wake up. Buyout funds have engineered a not especially clever way to turn relatively small tranches of your asset allocations into massive accretions of money and personal enrichment – and massive reputational risks for you. Much of their much-lauded returns are inflated by leverage; much of their heralded outperformance is whittled away by charges and fees that ensure that much of it goes back into their own pockets. Caricature? Unfair? I don’t think so. No wonder US presidential candidate Elizabeth Warren has the industry in her crosshairs.
