Wednesday, October 3, 2012

Kelly, The New Tycoons

With Mitt Romney’s presidential bid private equity has been drawn into the limelight. Even so, the public gets only glimpses, often skewed, of this behemoth industry and remains largely ignorant of what it is that private equity really does, whether it is as nefarious as it has often been portrayed, and whether it is a job creator or a job destroyer. Jason Kelly’s The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything (Bloomberg/Wiley, 2012) is a refreshingly balanced account.

Kelly interviewed scores of people for this book, including some of the biggest names in private equity. Granting Kelly access, of course, gave these titans the opportunity to shape the story. Naturally, they have—but in the process they have given private equity a human face, undoubtedly touched up a bit here and there with a few virtual botox injections.

Kelly explores the history and strategies of the best-known funds. In the process he tackles some of the issues that have hounded the industry such as excessive leverage, the tax deductibility of debt, financial engineering vs. operational expertise, the calculation of returns (where 66% of funds can justifiably claim to be in the top quartile on some basis or other), dividend recapitalization, and the lavish lifestyles of the super-rich fund managers. (By the way, although Stephen Schwarzman’s sixtieth birthday party was the most notorious example of “post-industrial late capitalism’s gaudy depravity,” as Schwarzman himself was described in Salon, it was “far from the only party of its type in the annals of private equity. TPG’s Bonderman had thrown himself a sixtieth birthday blowout five years earlier, in Las Vegas, with the Rolling Stones as the entertainment. In 2011, Apollo’s Leon Black threw a lavish sixtieth in the Hamptons featuring Elton John.” [p. 173])

Data on private equity firms can be difficult to come by, sometimes justifiably so. Take the question of job creation, for instance. Oliver Gottschalg, a professor at HEC in Paris, criticizes private equity for not providing enough data. This lack of data “points largely to the immaturity, and potentially the arrogance, of the industry and the individual firms. For years they took incoming fire around their activities without responding and developed a reputation as ‘strip and flip’ artists. Yet they never produced any evidence to the contrary, which looked to those on the outside like at best, pleading the Fifth Amendment.” Kelly continues, “The reality in several cases seemed to be that the data didn’t exist, at least in an easily accessible way. There also were questions around what constituted creating a job. Private-equity firms wrestled with whether they could or should count jobs where they were a minority investor, and whether jobs created after they sold their stake in the company should count. Echoing the political calculation used by the Obama administration, they also wondered aloud whether they should get credit for ‘saving’ jobs, that is, employment in cases where they bought a company that was likely to go out of business without their investment.” (p. 130) In recent years some private equity firms have been trying to gather employment information, but without a generally agreed upon benchmark their statistics will likely be viewed as so much fluff.

The New Tycoons is a gentle read even though it is packed with information. I’d wager to say that even private equity insiders will discover things here they didn’t know. For the rest of us with an interest in private equity but without the requisite keys to the kingdom, the book provides a carefully drawn portrait of an important part of our economy.

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