Wednesday, 2 April 2008

Fidelity attacks private equity boom, and so does Robert Peston

Not my favourite fund manager, obviously, but its global head of institutional rips apart the private equity industry's recent record in this piece in the FT. It's no holds barred stuff, I liked this bit:

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?


Charlie Marks said...

The answer isn't New Labour, that's for sure.

How long before Brown, out of desperation, declares himself a socialist - like Wendy Alexander, leader of the Scottish Labour party did recently?

Tom P said...

Very interesting times. I'm still not sure to what extent the financial chaos matters in the real world. Credit becoming harder to get must have some impact sooner or later but I'm no expert so no idea about how it would manifest itself.

For example, if mortgages are harder to get people will simply rent - so what? I'm not even sure falls in house prices matter that much if people have biought them to live in.

The political fallout is therefore really hard to estimate. I do get the impression that there is some anger at the City's role in creating a problem that affects us all, but it doesn't seem to feed through into party politics. Whatever you might think about Nu Labour, the Tories are far more up the a**e of the City. Yet they are well ahead in the polls.

Charlie Marks said...

Look at it like this - it's harder to borrow money, right? Some people have been borrowing money to pay of debts - without the ability to get out by getting into more debt...

Small businesses are being squeezed by the crunch and the effects of the lack of confidence will have an impact on investment - already surveys suggest employers aren't looking to take on more people at the moment.