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PE Panorama: A Black trigger warning

By Paul Mackintosh   
December 5, 2022

It's not often that I feel the need to preface an article with a trigger warning, but this is certainly one time. Some readers may reasonably dismiss the fresh reports around Apollo Global Management founder Leon Black, his relations with Jeffrey Epstein, and new rape allegations, as prurient muckraking. The lawsuit filed Monday in Manhattan Supreme Court by Cheri Pierson against Black and the late Epstein’s estate alleging rape is absolutely not proven. But I plead that this is relevant to investment into private equity because it speaks to the fundamental culture of the asset class, and is absolutely pertinent to allocation decisions.

Let's start with reputational risk. How can an Apollo limited partner feel now? How are pension fund trustees going to defend allocating to Apollo? Would they want to be in an asset class whose leading lights are implicated in such scandals? There may be plenty of reasonable justifications, but even a few more points of risk may be more than anyone needs.

Furthermore, I'm sure we’ve all heard the cliche that private equity is a compensation structure masquerading as an asset class. It is one of the few fields that investment bankers struggle to get into, and investment banking corporate culture still is all too redolent of the caricatures in American Psycho, The Big Short, and Oliver Stone’s Wall Street. What can we expect from a business model that attracts the greediest investment bankers?

Then there's the very masculine industry culture. According to a recent McKinsey & Co report, only 23% of US private equity investment roles and 21% in Europe are held by women.

Carlyle, Blackstone and Apollo all recently went through leadership transition issues, but I'm not aware of one major buyout firm that had a woman on its succession shortlist. How out of step that is with multinational companies worldwide. You know, the companies that private equity boasts it can reenergise and transform.

Apollo itself had a very public post-Black succession spat between co-founders Josh Harris and Marc Rowan - hardly edifying for the firm’s investors or the asset class.

Where does this stem from? Well, many of US private equity’s founding figures still head firms they created in the 1970s and 1980s, when funds were in the range of the US$100 million of Carlyle’s first vehicle. The asset class has mushroomed tremendously, but its structure, and perhaps culture, have not necessarily matured in step. Its long-term, unlisted nature encourages lack of accountability, insulated from public markets-style scrutiny.

To break that tendency, limited partners simply need to hold their general partners more accountable. It behooves those who allocate to private equity for good honest fiduciary reasons to hold the asset class to account; after all, they’re bankrolling this behaviour. US private equity has been indulged in its legacy culture for far too long already.