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.

Private Equity, Intriguing and…Complicated

Private equity is a passion investment with a difference, observes Paul Sullivan in the NY Times. Unlike art, cars or collectibles, "it is a financial investment, not a tangible asset. You can’t hang it on your wall, park it in your garage or serve it with dinner. But it has a cachet from the past successes of other investors, and the high barrier to entry creates an air of intrigue."

That air of intrigue covers a wide field – vaster than some investors may realize. The Washington Post's David Ignatius has been studying the murder of his friend and colleague Jamal Khashoggi. He finds that some members of the Saudi hit team that killed Khashoggi may have been trained, under U.S. government auspices, by companies owned by affiliates of a major private equity firm. He also notes that an Israeli-founded company noted for its phone-hacking capabilities is now a British private equity holding.

The appeal of private equity, writes Sullivan, is "the promise of exclusive deals, outsize returns and enviable cocktail parties." Some deals, however, may not be appropriate cocktail party conversation.

Private Equity: The Bigger They Come...

Theranos and founder Elizabeth Holmes raised $700 million from mostly wealthy investors without ever having to provide financial statements audited by an independent public accounting firm.

–Marketwatch

Rarely have so many high-profile figures been known to have lost so much money on a single investment.

 –The Wall Street Journal

Investors who lost hugely on Theranos, the company built around a magically simple blood test that didn't work, include the family of Education Secretary Betsy DeVos, Walton heirs, Rupert Murdoch and Mexican tycoon Carlos Slim.

Although Theranos' big-name investors lost plenty – the Walton family had invested $150 million – presumably their standard of living will not be affected. Mere millionaires who jumped at the chance to invest along with the big shots may not shrug off their losses so easily.