Private equity as we have come to know it is all about debt – lock, stock and sinking barrel. There may have been better management and better incentive structures in the deals of recent years. But they really contribute nothing to the overall return when compared with the impact of the leverage in the capital structure.
He also refers to a paper by Citibank on the role of leverage in generating returns which sounds very interesting. And it makes it even more annoying that the Walker Review dropped the recommendation that PE firms should publish attribution analysis.
Private equity also took a pounding in Robert Peston's rather good Super Rich: The Greed Game which was on BBC2 last night. Speaker after speaker made the point that using cheap debt accounted for the lion's share of private equity's performance. The point was also repeatedly made that in the rise of securitisation, private equity and hedge funds asymetric risks developed, with investors on the losing side. Probably the most surprising thing of all was the consensus that the growing gap between the rich and rest of us was a significant political problem. But who is going to do something about it?