PE under attack?
New report was issued by the "American Federation of Teachers" - the largest nationwide union representing teachers, issued a report decrying private equity.
Couple of big pieces mentioned:
- PE performance is relatively mediocre:
- This report makes clear that private equity performance as a whole has hardly been as impressive as the industry has claimed, and that it has worsened in recent years. Key indicators also suggest that there is a significant risk that overall private equity performance will deteriorate further in coming years
- PE brings a high degree of risk to investors (higher than public markets)
- LPs indirectly face a number of risks that result from the private equity business model. The structure of the leveraged buyout itself presents a range of risks for the investor and the portfolio companies alike. Problems with the latter can subsequently translate into reputational risks if other stakeholders are affected. Moreover, the choice of investment target can introduce additional reputational and regulatory risk, even, and perhaps especially, in cases where LPs are unaware of the ends to which their capital has been deployed.
- Pensions should take steps to neuter PE (e.g. reduce leverage used, make companies personally liable for bankruptcy, etc.)
- Consider supporting federal legislation, such as the Stop Wall Street Looting Act, that would mitigate some of the investment risks associated with private equity.
Curious as to how folks think about how this and other stirrings will impact the industry at large. I'll admit some PE funds have relatively predatory practices, while others truly generate value. Will be interesting to see how this all plays out over the next few years...
Is that because UHNWIs and family offices will sign the siubscription documents after a cursory meeting with the Partners where they are force-fed the firm's marketing rhetoric?
Lol, what?
Considering that the LPs we work with are founding GPs from major investment firms regularly discussed on this forum and former executives from the sector we cover, no, that's not even remotely the case. They are highly sophisticated, have an ultra long-term view given that their goal is preserving wealth for generations granting us flexibility, bring actual value-add through their networks (not just sitting there, will actively help us influence the trajectory of portcos), and aren't bogged down by the idiotic opinions of the MSM and various employees that pay into pensions while simultaneously decrying the very industry that makes them even remotely viable.
Unless you're at a MF/UMM where you have absolute say over who gets into your oversubscribed fund and who doesn't, and you require the large check sizes that only pensions are capable of, most people in PE would agree they've become the very definition of someone who bites the hand that feeds them. They're a pain in the ass to work with and expect special treatment just because they're big while they bring very little to the table other than stacks of cash. Like I said, UHNW & family offices all the way.
Ok, because my comment has elicited a response like this, I'll expand on my view. I work at fairly sizeable asset management firm with PE fund, secondaries, co-invest and private debt strategies. We have hundreds of LPs spanning the spectrum from pension funds, E&Fs, SWFs to single family offices and UHNWIs. I get looped in every now and then to provide an update on strategy and positions to LPs. The more well-resourced pension funds and consultants are by far the most active investors in terms of really trying to understand what's in the portfolio and how they are doing. I have seen single family offices writing $20 - $100mn checks after one meeting, in one case, without even having been into the data room.
At least in my experience, due diligence is weakest for family offices and UHNWIs. You talk about your LPs being founding GPs - UHNWIs from the asset management space is only a fraction of the total market, so your comment is simply not representative of the entire market. Also in my experience, many of these founding GPs place capital into other funds much in the same way Leon Black does his diligence on how to choose for a tax advisor. They go to their buddies and will invest as long as there is some conviction in the GP's ability. The vast majority of their wealth will undoubtedly be tied up in the firms they founded.
Save me the whole song and dance about PE making pensions viable. Public pensions are by far the largest LP in most PE funds being raised today. Your carry pool (or that of your bosses) through reduced fund sizes will be a whole lot smaller if these pensions were not PE investors. Biting the hands that feed them - oh give me a break!
Try again buddy.
They mad they can't get returns like OTPP?
This the same thing happened in hedge funds a while back. Performance is great -> crowding -> poor performance -> increase risk to maintain returns -> few funds blow up -> LPs get wise and demand lower fees and more compliance
PE still has a strong 20+ years ahead of it, don't worry.
PE has been under attack forever. This won’t change anything
Just wait until funds start rolling out to retail investors...my guess is PE is still early innings...inflows could be staggering.
lol that would only make returns worse
asset aggregation and mgmt fees...we aren't talking returns...we are talking about is pe going by the wayside, and the answer is no, likely quite the contrary
I think I heard Taleb say something about this type of thinking one time.
Ha finally.
I would agree with this article. I have worked on the GP side and am now on the LP side.
Here are my thoughts.
Most LPs view MFs as pure beta / lower return than historic - mostly because they are generalists and compete in auctions. The higher returns are in the MM, but idt it will last long as everyone is coming into MM and asset prices are slowly going up.
With respect to predictable practices and VCPs, I would say that predatory practices and shitty VCPs are the norm, not the exception. After starting my current role, I have my own list of firms that I respect, don't like, and hate/would never work for/recommend...majority of the firms fall into hate or don't like.
Why don't I like some of the firms? Well predictory practices is one. They never give a direct answer to tough questions (sometimes LPs just want the truth!). It is clear that they don't give a shit about their portfolio companies or the bottom-level workers at those companies (and I don't mean in terms of laying off, I mean in terms of their health/safety/etc.) ...they will grumble and do the minimum necessary to comply with legal. They withhold information on their portfolio companies ...some justify it by saying it would reveal their "proprietary data", like really? you are going to tell me that the midwest plumbing company you bought in a traditional LBO process with a template VCP (cut costs, etc.) is "proprietary". The lack of information, even after requesting, really gets me suspicious as to whether they know anything about the company they are investing in.
It's pretty clear some level of reform is needed, at least for certain industries. Look at how PE has gutted the nursing home industry, leading to the early deaths of tens of thousands of people. Certain industries just shouldn't be touched by PE / "sophisticated investors." There's a huge difference between aggressively cutting costs and expanding the client base and improving the bottom line in a paper company vs a nursing home or hospital.
Does Private Equity Investment in Healthcare Benefit Patients? Evidence from Nursing Homes | NBER
Having just dropped 3k for a sick dog - ie not a disease/cancer/surgery - the vet business is another one in this bucket. Community practices have been rolled up and essentially turned into local monopolies with complete pricing power. Sure free mkt blah blah blah and a pet isn't a human...but still super shady in my opinion. Likewise, 60 minutes had a recent episode on that most expensive place to have a baby in the US is Sacramento, CA, because one investor led hospital network has a pure monopoly. That is insane.
Agreed. I think healthcare services is a field that the free market just doesn't have a good answer for. When downgrading the client experience to bolster the bottom line = more people dying, it's time to rethink your investment and operational strategy.
Don't get me started on HC (ppl or animals). I have seen some messed-up shit/pitches from GPs. I have even refused to be part of 2 deals that I didn't believe in (not from a return pov). While I am not a fan of my firm investing in these types, I am thankful that I have not been fired or given a lecture for refusing to be part of the deal team.
PE should be banned from investing in HC!
That's great to hear about your firm, at least in terms of them letting you sit deals out. I've had ruled out a few firms from consideration for lateral ops because of their insistence on certain investments (private prisons, nursing homes, predatory lenders, etc). I would feel too shitty working at a firm like that.
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