Wednesday, August 07, 2019

Private Equity: for Better or for Worse?

At best,  private equity firms acquire so-so-companies and make them better businesses. At worst, they loot and scoot, stripping companies of assets and leaving them buried in debt.

Presidential hopeful Senator Elizabeth Warren sees the worst. She proposes to make private equity firms responsible for the debts and pension liabilities of companies they control.

The SEC chairman sees the best, advocating changes that would allow everyone access to deals now limited to well-heeled investors.

When your obedient blogger was a lad, private equity was truly private – a deal your lawyer or financial adviser put together. Now that private equity is big business, regulatory proposals are inevitable.

Bigness, however, does not necessarily result in superior returns for investors. For the fiscal year ending in June, the median public pension fund earned a return of less than 7%. A plain vanilla portfolio of 60% stocks, 40% bonds would have earned better than 9%.

Apparent reason for the pension funds shortfall? Significant investments in alternative assets, notably private equity.

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