Cramer vs. Rubenstein - the Private Equity Debate
I just watched this interview from back in March of Jim Cramer, former hedge fund manager and host of CNBC's "Mad Money," criticizing the private equity fund industry. He was followed by a rebuttal by David Rubenstein, the co-founder and co-CEO of the Carlyle Group.
I have no doubt that the financial services industry in the United States adds a lot of value to our companies and our economy. However, hearing this from Jim Cramer, a finance guy through and through, does make you stop and think about the industry a little bit. For those monkeys who have worked in the industry for a few years and have seen the impact of your work, how valid were Cramer's accusations and Rubenstein's rebuttals?
Cramer also supports herbalife and retail investing
This follows from another thread about Cramer at the end of last week. He has to be everything to everyone and that is exemplified here. I thought I was watching MSNBC there and those were the nightly talking points that political pundits are given to rant about for the week. It's a real shame that financial television and journalism in general has turned it's back on anything constructive in favor of throwaway lines I expect to hear from people running for office.
Sorkin: "What do you think of PE firms as stocks?" Cramer: "You didn't ask me to comment on their contribution to society, but I'm going to pretend you did and then, while I say I'm not going to comment, I'm going to comment extensively while feigning sadness and defensiveness." Rubenstein: "... This fucking guy? Do I really have to talk to this guy?"
Cramer's facial expressions are hilarious.
My 2 cents:
He seems like he has a chip on his shoulder. Too short of a clip but Cramer's only major concern is carried interest?
Also, many people seem to think that outsourcing is a greater evil than carried interest (these "great" retail corporations he lists are contributing heavily to that) while at least PE keeps the intellectual capital at home. David refers to this as well, as our skills in this sector are of much envy to the rest of the world and is probably going to be a major competitive edge for Americans in the next decade.
I doubt we're going to be known as the #1 country for handing out coffee. That skillset can be done for 1/10th of the cost and 10x the service elsewhere.
How much is really skills ? I mean when companies go private they have a lot more possibilities to restructure themselves that they don't have while they're still listed otherwise their stocks would get destroyed. Why the thing that PE managers do couldn't be by people outside PE ? Most of the time, and Mr. Rubenstein said it himself, you turn around companies, why do we need to take companies private to do that ? Isn't it another example than our stock markets don't work ? I think that PE is doing a pretty good job at fixing something that is broken, but why not fixing the broken part then ?
"How much is really skills ? I mean when companies go private they have a lot more possibilities to restructure themselves that they don't have while they're still listed otherwise their stocks would get destroyed."
I think you answered your question. One of a multitude of reasons you take a company private if the goal is to un-fuck it is because when you're a public company you're a slave to the quarterly/annual earnings, projections, Sarb-Ox and other regulation and the list goes on. When a PE firm does a take private, they have 5-10 years of operating a company privately to turn it around with no one looking over your shoulder except for lenders making sure you're not tripping any covenants. You get to take a long term outlook and not have to smooth out earnings to the quarterly task master, you can make capex investments where appropriate and not care if it drastically affects the B/S too much in one quarter, etc, etc. They could also leverage the hell out of it, lay off a lot of people and sell assets. If a PE firm is able to buy a company where its highest and best use is to do this, then it wasn't going to survive in its present state anyway. I hate to sound like Gordon Gecko though.
"How much is really skills ?...Why the thing that PE managers do couldn't be by people outside PE ?"
If I correctly understand question/comment: anyone can. You personally can go out and buy a failing public company tomorrow and there is nothing legally keeping you from doing so. Unfortunately, you'd have to raise millions of dollars in equity from someone and be able to convince debt investors that you have the track record for them to take the risk on you with leverage. Since you'd also be throwing your own cash into it (because there's always co-investment by the GP), you'd probably had to have made a decent amount of money yourself and be confident that you have the experience in that industry to do so. This is called a management buyout, and they'll typically partner with a PE fund for the equity and the expertise to raise the debt and do the LBO.
"Isn't it another example than our stock markets don't work ? I think that PE is doing a pretty good job at fixing something that is broken, but why not fixing the broken part then ?"
What's broken about the public markets? Their reliance on regular quarterly and annual financial data and how it may effect the perceived value of the company and its relation to the share price of the company and therefore the decision to buy or sell the stock? That is the stock market. I don't invest much at all in the public markets but it's not because they're not efficient capitalist markets. If, as a company, you don't want to have to regularly report to multiple outside equity investors, you shouldn't go public. But not everyone is a Cargill or Koch that can grow over generations to become massive closely held private companies. Most, not all, large companies use the public equity markets to finance growth. That's why they were created and why they exist. Not so a bunch of guys could run around on the floor of a building on Wall Street wearing funny jackets, or a bunch of talking heads on CNBC could debate the merits of ketchup stains, or for a bunch of us sitting on a website anonymously posting, but so that companies could access systematic equity investors in an organized market. And investors could invest in transparent and regulated companies for a return on the capital greater than the lowest risk investment out there. Maybe I'm inferring from your comments too much, but you seem to be calling for regulation in the market to do (I'm not quite sure what exactly) something?
There are a ton of PE strategies and I'm not going to get into them, but Cramer, who I don't hate, seems like a whiny bitch in that clip. Are PE firms (and I know VC officially falls under PE but I don't blow smoke up other people's asses, let alone my own and lump them together) the same as entrepreneurs or true VC's who invest in very early stage companies? No, and they don't pretend to be. Just because Cramer didn't take a carry (first time I ever heard that and it's tough to figure out how he made >$50MM if he didn't, but I'll admit that I don't know much about him in detail) that somehow makes PE bad? You could lay out arguments that HF's invest in derivatives, short stocks and do dozens of things that don't contribute to growing the next Starbucks but that doesn't make them bad. That makes them part of the US economic system. It's the same with PE.
This type of argument could go on ad nauseum and has and I apologize for the mini-rant, but coming from Cramer it's absolute hypocrisy coming from a former HF guy who now is a talking head who makes tons of money by acting like a lunatic on TV pitching investment ideas.
Spent some time in PE. After seeing the PE machinery operate from the inside and seeing the impact on portfolio companies, I would say that overall PE firms are probably not a huge positive for the economy generally and companies specifically. There certainly are some cases where PE firms save a company from going under, turn things around, save jobs etc., but I would say such cases are the exception, rather than the rule these days. More often PE firms buy companies in banked processes (a lot of times from another PE firm) at a high price, put a bunch of leverage on the company, screw around with things like what kind of metrics should be included in the monthly reporting packages, maybe do a dividend recap if the markets are hot, and then try to sell the company to an idiot strategic (or another private equity firm if the market is still really hot) a few years later. All of these transaction events (buying / selling, recaps, etc.) are a huge distraction for management and they don't exactly help company morale. Plus it's really hard to effect any meaningful change in a couple years. By the time your changes are starting to take effect, it's time to sell again. And that's assuming the PE firm actually knows what changes should be made (PE firms get this wrong fairly often).
As for the "money" PE firms make for pension funds, I'd say you have to take this with a grain of salt. There are certainly a few firms out there that consistently post solid returns, but for most firms the "money" they make is just a function of vintage year (raise a fund in a great market, get great returns, raise a fund in a bad market, get bad returns). On top of that, sometimes it kind of seems like the whole thing is a bit a of shell game -- PE firms sit around selling companies to each other, and as long as there is always a greater fool willing to pay more for the company then things are good and it appears that the PE firms are making the pension funds rich. But of course, this isn't true "growth" or "wealth."
What PE firms are good at is convincing institutions to give them absurd amounts of money (what other industry would let 4 or 5 guys control $1 billion+ dollars), moving that money around more or less risk free (to the PE firm), and collecting massive fees in the process.
All that said, I don't really fault PE firms for any of this. We have a tax system that rewards debt financing, a financial system that rewards huge amounts of leverage, and a political system that encourages promises of huge, unfunded perpetual payment streams. And all of this is overseen by people who have no skin in the game whatsoever. Private equity firms are just playing the game, and playing it quite well I might add.
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