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June 2022
AAM Magazine
June 2022
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PE Panorama: Shot by both sides

private equity
By Paul Mackintosh   
May 16, 2022

Private equity is getting it from both ends of the US ideological spectrum in the media. On the left is Mother Jones, with a multipart special under the banner “How Private Equity Looted America”, condemning the asset class as “a powerful, and malignant, force in our daily lives” enabled by “vulture capitalists” and complicit politicians.

On the right is an opinion piece in The Wall Street Journal by Jeffrey Hook, author of The Myth of Private Equity, headlined “Private Equity Doesn’t Deliver”, which says the asset class is a market failure, soaking up huge institutional contributions despite its aggregate failure to beat public market benchmarks.

Mother Jones, as you’d expect, devotes extensive coverage to anatomising the failed buyouts and dire social consequences following private equity investment. But its most trenchant criticism is reserved for the failure of repeated attempts by US administrations as diverse as Barack Obama’s and Donald Trump’s to close the carried interest tax loophole. Columnist Tim Murphy emphasises that this gives the asset class “an enormous competitive advantage over other forms of investment”.

He chronicles how successive efforts to close this loophole were derailed by industry allies on both sides of the Republican/Democratic divide, estimating that private equity lobbyists spent some $75 million in the five years after 2006 to keep the carried interest loophole open, while firms contributed handsomely to the campaign coffers of both parties. The American Investment Council is clearly making investments of a kind.

On the other side of the fence, meanwhile, Hooke points out that, according to the private equity industry’s own statistics, 75% of funds fail to beat the S&P 500. That’s frankly a farcically high failure rate for such a well-financed industry; but, he maintains, “institutional trustees lack the financial knowledge and drive to challenge their investment staffs”.

As research elsewhere has shown, one attraction of private equity to pension funds is that the quoted return at the time of investment may be nothing like the final return when the fund is fully invested and exited. That’s a perverse incentive for pension funds to commit, cross their fingers, and hope - despite the three-quarter odds of getting it wrong.

My own analysis is that private equity houses have bloated up assets under management while clinging to an unreformed structure far more suited to a smaller, more niche asset class. In this unattractive vision of delayed adolescence, private equity throws its pumped-up weight around, but whines like a spoilt little kid when someone tries to rein it in.

It’s long past time for US regulators to take a mature approach and impose constraints on the industry truly commensurate with its size and position in the financial markets. But good luck to that, with all those lobbyist dollars floating around.