Private equity

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That genre of business getting kudos is a sham. Take a perfectly fine business operating at a profit, promise a higher profit margin, do a leveraged buyout. Load it with debt, pay back your own investment through management fees and dividends, sell. One variation is to engineer a bankruptcy, thereby assuring the labor contracts and the pensions of the employees are negated. Pensions are dumped into PBGC [taxpayers], restructure and sell.

Private equity only enriches the private equity partners. Analysis-of-Private-Equity-Business Look at who is tauting the benefits of PE model. Outside of finance the same tactic would be arson. Burn down the business to claim insurance [PBGC is insurance, same as FDIC]. The premiums of PBGC are not high enough, and bankruptcy courts don't pursue the fraudulent conveyance nature of PE bankruptcies enough. The courts are packed now with the progeny of the Powell doctrine.

Michael Gross, a founding partner of the private equity firm Apollo Management LP who is now at a hedge fund, recently asked a group of business students at Northwestern University this question: In three years’ time, what might the private equity and airline industries have in common? His answer: From day one, neither will have ever made a return for its investors.

It’s hard to imagine another industry that has suffered quite the unmasking that private equity has. Hedge funds underwent a calamity, but their basic business of buying and selling stock still works in a leaner world. The business of providing investment advice and making trades—the meat and potatoes of investment banking—will exist even if no independent investment bank does.

But private equity firms are another matter. Once, they purported to be in the business of buying troubled companies and turning them around. They contended that they could manage the companies better away from the public glare of shareholders. That pretense was dropped during the boom earlier this decade. When private equity shops took over companies like the Texas utility TXU Corp. or the casino operator Harrah’s Entertainment Inc., which was bought by Apollo, it was clear that these were thriving enterprises, not troubled at all. The private equity firms were simply engaged in “financial engineering,” a then-admiring euphemism for a simple conceit: loading up fine companies with massive amounts of debt in the hopes of flipping them to new owners at some point down the road.

Read more: http://www.portfolio.com/views/columns/wall-street/2009/02/11/Analysis-of-Private-Equity-Business#ixzz1vcCbhjVm

Another step by step narrative of the model.

"Oh we're investing teachers' and firefighters' pensions". If the teachers and firefighters knew what was being done with their pensions, I think they would reject that investment. They could do so, still.

douglaslee's picture
douglaslee
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Jul. 31, 2007 4:01 pm

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Thanks Douglas. Hopefully, this subject will become commonplace this year due to this election.

Not to be too nit-picky, but the Powell Doctrine:

http://en.wikipedia.org/wiki/Powell_Doctrine

is different than the Powell Memo (which I assume you were referring to).

The Powell Doctrine (IMHO) is actually a good thing that we have unfortunately not adhered to in our last 2 major wars.

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Laborisgood
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Jul. 31, 2007 4:01 pm

Nor, did he, to add to his Vietnam shame. Projecting the positive and hope onto Colin Powell has become a liberal delusion simply because he set a proper rhetorical standard as a military professional after the fact. Powell and Condi both are tragic figures of twisted ambition. They served the dark powers and succeeded for it. They do not come to accountability, so they hang around in the stench of decay no matter how well they are dressed and presented. They are as nothing compared to the rotting Darth.

On the issue of "private equity" I hope we can avoid the con attempt to blur the distinction between what douglaslee describes and honest risk investment in business development and innovation. In the origins of "investment capital" intervention, you do find the "financial manager" as consultant to civic and corporate organizations where learning how to do it right really helped. It was about getting the businesses, towns or non-profits back up on their local ownership feet.

"Venture capital" is the honest game where risk is real and reward is great. It is about getting ideas into practice and production, and it is a prime example of how money serves as the energy to make the economic system works when it flows, not when it is "kept." Having private venture capitalists able to give the financial energy to great ideas is a vital part of a larger vision of our collective invesments in a smart future. The funny thing is that what makes for good venture capitalists is the ability to see the value created by the idea rather than the money first. The good ones fund the development of value oriented businesses, not "cash cows."

The value of "hedge funds" and other financial instrument management for a healthy energy system for Commerce (and society) are limited and really have nothing to do with the mission of money. In the image of electricity, they are about the management of the grid and how to keep the system in balance when actual use is not equally spread out. The irony of this being what banksterism rises out of aside, it ought to be clear that our social economic crisis requires fixes for just about everything other than the bankster businesses. They need to find honest work or even to be punished for their crimes.

drc2
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Apr. 26, 2012 12:15 pm

I did mean the memo, not doctrine. I would like to see the corporate raiders, cum junk bond, cum leveraged buyout, now morphed to private equity covered properly. Financial engineering creates wealth for only the engineers. A proper algorythmic model could be taught to businesses and incorporated into their accounting as a flag when they were at risk. Poison pills used to be the antidote like a crucifix to a vampire. Esops could be encouraged as well. Marriott as a publicly held company still has control through classes of stock. Family shares are worth 10 votes to every 1 vote of common shares. In an esop [traditionally 51% of outstanding shares], a mere 10% ownership with the super vote count like Marriott could protect from a raider, or vulture, or parasite, or romney. Marriott family is Mormon, so was Cecil Day of Day's Inn.

As an aside, Utah is the home of MLM industry [think amway]. Multi Level Marketing [aka ponzi and pyramid schemes] is also known as Mormons Losing Money.

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douglaslee
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Jul. 31, 2007 4:01 pm

I think the Bain Capital issue has real legs for the November election. What do you think?

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Art
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Jul. 31, 2007 4:01 pm

The "real legs" are running away from Obama because major money flows into the war chests from these guys. Check Blackstone Private Equity that just held a $35,000/plate dinner for Obama. Funny Obama did not mention the "vulture capitalists" at that dinner.

None of the other phoney diversions he has tried so far have worked he might as well give this one a try.

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THISAA
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Dec. 16, 2011 6:49 am

An Alternative to Capitalism (if the people knew about it, they would demand it)

Several decades ago, Margaret Thatcher claimed: "There is no alternative". She was referring to capitalism. Today, this negative attitude still persists.

I would like to offer an alternative to capitalism for the American people to consider. Please click on the following link. It will take you to an essay titled: "Home of the Brave?" which was published by the Athenaeum Library of Philosophy:

http://evans-experientialism.freewebspace.com/steinsvold.htm

John Steinsvold
“Insanity is doing the same thing over and over and expecting a different result."~ Albert Einstein

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John Steinsvold
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Apr. 16, 2011 6:55 pm

Currently Chatting

First Columbia took on their drug lords, now they're taking on their billionaires...why can't we?

America’s billionaires are driving this nation’s poverty epidemic. But it doesn’t have to be that way.

As we speak, working-class Americans are getting screwed over by policies that favor the wealthy elite, and leave everyone else in the dust. As a result, more and more Americans are living in poverty.

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